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AIB Weekly Market Brief: 11th - 15th December

Information for this article has been kindly supplied by AIB

With agreement reached between the UK and EU negotiating teams in relation to ‘phase one' of the Brexit talks, this week’s EU Leaders Summit will likely give the go-ahead to move onto the next phase of negotiations. EU Council President Donald Tusk has stated that he will propose to the leaders that talks should now start on the transition period as well as discussions on the future trading relationship. Sterling made modest gains on the back of the latest developments. Although, the move below the key 87.5p level against the euro was not sustained on Friday. However, President Tusk also stressed that the “most difficult challenge is still ahead” with less than a year left in reality to agree on a “transition arrangement” and a “framework” for future trade relations. This means that sterling will remain highly sensitive to the ebb and flow of the Brexit talks.

However, with less uncertainty now heading into the Summit, the focus for markets is likely to turn towards monetary policy with the Fed, ECB and BoE all having their December policy setting meetings this week. The main focus will be the Fed, with markets expecting a 25bps rate hike, bringing the fed funds rate to 1.375%. This would represent the third 25bps hike this year. The Fed has also started to reduce the size of its balance sheet which is another form of policy tightening. It is important to note that 2017 represents the first time in this tightening cycle (started in December 2015) that the Fed has been able to following through on its projections.

The ECB meeting is likely to be a less compelling affair, with no changes to interest rates anticipated. However, President Draghi’s press conference will be looked to for further insights into the potential timeframe for the phasing out of QE. Markets will also be focusing on updated ECB staff macroeconomic projections.

After hiking rates in November, in order to tackle above target inflation, no further policy changes are anticipated by the BoE this week. The meeting minutes, which accompany the policy decision, will be combed through for any updated economic and policy views, particularly given the progress on Brexit talks and the resulting impact on sterling.

There is also a busy data schedule this week. The key Eurozone release will be the flash December PMIs. They are expected to edge lower in the month, while still pointing to an improved pace of growth in Q4.

In the UK, employment is expected to decline by 10k in the three months to October, having recorded a fall of 14k in the three months to September. Despite this, the unemployment rate looks set to have remained at a 42-year low of 4.3%. Average earnings growth is forecast to pick up to 2.4% in October. Retail sales and CPI inflation for November will also garner some attention in the coming days.

Exchange Rate Forecasts (Mid-Point of Range)

Current End Q4 2017 End Q1 2018 End Q2 2018
EUR/USD 1.1752 1.17 1.16 1.15
EUR/GBP 0.8764 0.88 0.88 0.87


132 132 132
GBP/USD 1.3408 1.33 1.32 1.32


113 114 115

Current Rates Reuters, Forecasts AIB's ERU