Good morning,

We’re getting there

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.

Despite this, a vote on the bill has been postponed until next week.

Sterling remains strong on good manufacturing

UK manufacturing PMI rose to its highest level in 4 years in November we found out this morning. This is hopefully a further indication that the weakness in sterling is finally allowing the export sector to take advantage of some price competitiveness. A WorldFirst survey released last month showed that 1.1m fewer companies traded internationally in the past year than the year before given uncertainties on Brexit and investment.

Obviously manufacturing makes up around a 1/5th of the UK economy that the services sector does and the overall lack of rebalancing in the UK’s industrial strategy means that any increase in UK growth dynamics are likely to be fringe benefits.

In the mixer

It was a mixed day of data for the euro as we saw an improved unemployment figure in the Eurozone, however preliminary inflation numbers 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, we had ECB Governing council member Peter Praet speak and announce ‘the breadth of expansion is notable’ and 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.

Have a great day.

Jeremy Cook, Chief Economist