Good morning,

USD: Disagreement on inflation

The US dollar has weakened to its lowest level in a week as traders seem happy to sit and wait on more clarity on the outlook for both the US economy and who will eventually take over the role of Fed Chair from Janet Yellen. Last night’s minutes from the most recent meeting of the Federal Reserve highlighted that not all members are completely sold on the inflation picture confirming a hike in interest rates in December.

The look therefore is one of data dependency and none will be more important than the US inflation number due tomorrow afternoon. While any inflation report is multi-faceted there is an element of binary decision making that markets will make tomorrow; good number and the dollar recovers, bad number and further proof will be needed for the dollar and US debt markets to get comfortable with the idea of the Federal Reserve raising interest rates once again.

President Trump’s tax plan continues to move the USD as well and with little new insight, the wait is becoming a drag on the USD. During a meeting with Canadian PM Trudeau on Wednesday, US President Trump said that if NAFTA members can’t renegotiate a trade deal, “it’ll be terminated and that will be fine.” Trump added that the US would pursue a separate trade deal with Canada or Mexico if a deal couldn’t be reached with both countries.

NAFTA had been cited in the UK as a trade deal that the UK could join post-Brexit.

GBP: Brexit press conference due

The 5th round of Brexit negotiations ends today and David Davis with Michel Barnier will hold their typical post-match press conference. Some good news yesterday emerged from Germany in that the country wants British banks to get transitional access to EU markets if Brexit talks drag on.

No agreement on a transition will be forged however until separate agreements on the ‘divorce’ payment and the rights of each other’s citizens are also put together. A plan was due to be in place for the EU summit next week but that seems to be little more than a pipe dream given the speed of the talks.

Chancellor Phillip Hammond is getting both barrels in the Brexit press this morning for a rather ‘forlorn’ testimony yesterday to the Treasury Select Committee on his department’s preparedness for different types of Brexit. While funds that may be needed for a no deal Brexit will not be spent during this year’s Budget you can bet your bottom dollar that they will not be spent anywhere else either.

Davis and Barnier are due to update us just before noon.

EUR: Deadline set

The political chicanery of the Catalan independence situation is not roiling markets yet but still has the ability to do so. Spanish Prime Minster Mariano Rajoy has asked the Catalan government to clarify whether or not it has declared independence and yesterday accused Catalan president Puigdemont of deliberately sowing confusion. The PM also told the Spanish parliament that the Catalan government had eight days to drop its independence bid, failing which he would suspend Catalonia’s political autonomy and rule the region directly.

The risk clock is therefore set for next week.

Have a great day

Jeremy Cook, Chief Economist