Good morning,

EUR: In the mixer

It was a mixed day of data for the euro with an improved unemployment figure in the Eurozone tempered by preliminary inflation numbers that came in lower than expected. This is a slight knock to the bulls hoping for an end to QE sooner rather than later.

Despite the knock to inflation, the ECB Governing council member Peter Praet announced ‘the breadth of expansion is notable’ and noted that the current growth trend is re-assuring. Praet wasn’t too concerned with the inflation reading so the euro was able to gain ground against the dollar over the afternoon on these positive comments. This may be a sign that the ECB could begin to change its tone on the easing-cycle.
Manufacturing numbers out tomorrow will give us an indication of business conditions in the manufacturing sector across the EU. The numbers are expected to remain the same, however a move either way could create volatility around the euro. A positive number could certainly give us a good run for the euro. The data is expected at 8am GMT.

USD: Tax plan edging closer to agreement

Despite a busy week of US economic data, there has been little to wobble the interest rate tightrope walk in December. As a result there has been relatively little action on the dollar front.

Yesterday’s PCE inflation number – the most watched inflation measure in the US – rose a little but was not enough to prevent a sell-off in the USD. The Federal Reserve remains on course to hike rates later this month but had hoped that the mid-year slowing in core inflation would prove temporary. Yesterday’s data supports that but does not do much to extend expectations further than December.

Trump received a tax bill boost after Senator John McCain gave his vote to help drive home Trump’s first legislative win. McCain had been one Senator who had voted against the repeal of Obamacare but has sided with the Trump administration on tax. This move pushes the Republicans closer to the 50 votes needed to pass the tax plan.

GBP: Empty Threats

It was clear that from the beginning of the supply and confidence agreement between the Conservative party and Northern Ireland’s DUP that tensions would be found squaring the Brexit circle with the question of the Irish border. Yesterday the DUP announced that they would end support for the UK government should they stop defending the union.

While this may sound like a shot across the bows, we sincerely doubt that the DUP would withdraw support from a Conservative government and allow Jeremy Corbyn any closer to No.10 than he currently is.
Sterling has remained resilient in the past few days and has rallied well against both the euro and the dollar. We can but hope that the weekend papers do not rock the apple cart before Theresa May’s lunch with Donald Tusk on Monday.

Have a great day and a better weekend
Jeremy Cook, Chief Economist