• EU-UK talks: Will there be a deal? Negotiations that could decide the UK future in the EU continue today, as the European Council concludes its two-day summit. Even though there are several topics on the agenda, amongst the main points of discussion is the UK in/out referendum and the proposal by the EU to the UK PM Cameron. During the first day, there have been conflicting accounts on the progress of the negotiations. European Council President Tusk has stated that some progress was made but a lot remains to be done, while Italian PM Renzi said there had even been some backward steps. The meeting will be closely watched as a proxy for the likelihood of a “Brexit”. If the two sides manage to strike a deal, Cameron will immediately begin organizing the referendum for as early as June, maintaining his political momentum and increasing his probability for success. In that scenario, sterling could strengthen considerably as market expectations for a leave-vote could be scaled back. No agreement might imply that the UK may have to compromise with less favorable terms in the future, if they indeed want to strike a deal, as the clock is ticking against them going into the next meetings. This could bring the pound under renewed selling interest, but the reaction may not be as big as in a potential agreement. The most desirable referendum date for Cameron is the 23rd of June. Therefore, given the 4-month notification period, he may have to accept a proposal at the next scheduled EU summit on the 17th of March at the latest, if he wants to get the vote in June. There has also been talk of a special summit before the 17th of March. The leaders of both the EU and the UK want to decrease the possibilities for a Brexit as much as possible. So we believe that, if not today, they will reach an agreement by the end of March. One thing is for certain: PM Cameron is unlikely to call for a vote empty handed.
• As for the indicators today, Eurozone’s preliminary consumer confidence for February is forecast to show that consumer sentiment sank even further into the negative territory. We also get Sweden’s official unemployment rate for January. • From the UK, we get retail sales data for January. Both the headline and core figures are expected to have risen, a turnaround from December’s fall. The rise may be due to post-holiday discounting and a further decline in petrol prices, which generally boosts other spending. Anyhow, we expect the reaction in the pound to be limited as the focus will be mostly on the EU summit.
• In the US, the main event will be the CPI data for January. The headline CPI is expected to have accelerated significantly, while the core rate is forecast to have remained unchanged. This suggests that, here as well, the acceleration in the headline figure could be partly due to energy-related base effects. Nevertheless, as the Fed has indirectly signalled that rate hikes are currently on hold, accelerating inflation could bring forth some expectations for rate hikes in the foreseeable future. We believe that even a bigger-than-expected rise would be insufficient to revive market hopes for a March action, but could boost speculation for more than one rate increases in 2016. This could add fuel to this week’s recovery of the greenback.
• Canada’s CPI rate is forecast to have continued rising and get closer to the BoC’s inflation target. However, energy-related base effects could be the driver behind that rise here also. Canada’s retail sales for December are also coming out.
• We have two speakers scheduled on Friday: ECB Vice President Vitor Constancio and Cleveland Fed President Loretta Mester.