Good morning,
Welcome back, we hope you had a restful and restorative festive break and wish you all the best for the New Year. Here’s a roundup of what has happened since the beginning of the Christmas break.
EUR: Powering on
EUR is above 1.20 against the USD this morning for the first time in three months, with the single currency widely bought through the Christmas period. This comes despite the result of the Catalan election that put pro-independence parties in charge of the Catalan parliament. While looking like an endorsement of an independence strategy, the result is not something that will make the prospects of an independent Catalonia any more likely than it was following the ‘illegal’ referendum held back in October.
The single currency is a lot of analysts’ pick as a currency that will outperform most in 2018 and we would not be surprised if that were true. We are of a similar mindset given the growth story within the Eurozone and the likelihood that the most mature changes in monetary policy this year occur from the European Central Bank. For now investors are backing the single currency but the central bank has, in previous times, slapped the euro lower from such levels given the impact it will have on the Eurozone’s inflation numbers.
Similarly, hope and not fears for the Italian election on March 4th will be supporting the euro.
GBP: Look to data not politics for now
With Parliament in recess and Brexit negotiations on the back burner following the agreement that ‘sufficient progress’ had been made, the pound has had a quiet Christmas. New data, either good or bad, is going to have a lot more of an impact on the pound than politics for now we believe as traders continue to price what may happen with the Bank of England’s base rate in 2018.
Parliament is back next Monday and we expect the Brexit noise will pick up with that but sterling’s near term course will be marked out by today’s, tomorrow’s and Thursday’s PMI announcements from the manufacturing, construction and services industries respectively.
USD: Deficit maths hurting the dollar
It is not a happy New Year for the USD which is beginning 2018 at a one month low. There’s always one. The tax reform bill that Republicans spent most of November and December putting together and voting upon is now law and the USD is reacting to the negatives that the bill holds for the US’s budget deficit.
The Day Ahead
While most will spend their days recounting their New Year’s Eves, trying to remember their work login and wondering just how busy the gym will be tonight, markets will be focusing on how the manufacturing sectors in Italy, France, Germany, the UK and the US performed in December. Numbers from Asia overnight saw strength in Singapore and China, with contractions in Indonesia, South Korea and Malaysia.