Market jitters over tax plan keeps a lid on the dollar

October’s producer-facing price figures came in higher than expected, with price growth seen in core sectors as well as the volatile food & energy sectors. This all tallies up to producer price growth of close to 3% on an annualized basis, which runs somewhat counter to comments this morning from Fed member Bullard, who stated that there are questions if inflation is reliably returning to target. Economic focus now turns to tomorrow’s CPI figures which will shed further light on whether Bullard’s comment that the “current federal funds rate is right for the near term”.

The dollar traded softer this morning, particularly against the euro, as US treasury prices have ticked higher overnight, keeping yields particularly low. There are a few catalysts behind this and much of it still surrounds the attention on the House and their progress on Trump’s tax reform plan. US Representative Brady has been happy to brag about having enough votes to get tax cuts through the House of Representatives. The vote may come as soon as Thursday, when US President Trump is also due to speak on taxes. Any vote needs to pass the Senate however which has been a graveyard for Trump’s proposed legislation during the first year of his term.

Trump has also tweeted that he will “be making a major statement from the White House upon my return to D.C. Time and date to be set.” We would wager this will be something on either tax or trade policy.

German GDP growth the envy of Europe and the US

The euro’s trading particularly well against both the greenback and sterling following a very strong GDP release from Germany overnight. Growth rose by 0.8% in Q3 according to the latest figures, meaning that the German economy is on track for a growth profile of about 2.8% on the year. The UK’s is expected to be roughly half that.

EUR/USD now sits within spitting distance of 1.18 which, if crossed, would erase the bulk of the weakness in the currency pair seen since the end of October. The rally in EUR/USD will come under threat if tax plans progress materially by the end of the week.

UK still stuck in inflation quandary

The UK’s inflation figures this morning undershot both the market’s expectations as well as the Bank of England’s forecast. Nonetheless, 3.0% CPI is at the top end of the target range.

It appears we are coming to an inflection point in inflation in the UK, input prices are now only 4.6% higher on the year compared to figures of more than 4x that earlier in the year as the devaluation of the pound following the Brexit referendum falls out of the inflation calculations. If inflation is going to head higher from here it will be predicated on either higher oil and energy costs, additional falls in the pound or, as the Bank of England has been emphasising of late, from wages.

The day ahead

The data calendar is over for the day, but Japanese GDP figures for Q3 are due overnight, with UK labor market and wage figures due ahead of tomorrow’s US open.

Have a great day.