Let the downgrades begin

The International Monetary Fund cut its outlook for US growth on Tuesday, citing a lack of detail on fiscal spending and tax cuts from the Trump administration’s “still evolving policy plans.” The IMF revised their growth forecast for 2017 and 2018 to 2.1 percent.

The IMF said that latest budget plans would place a disproportionate share of spending cuts onto low- and middle-income households, undermining “the budget’s goals of promoting safety and prosperity for all Americans.” They provided a broad set of recommendations that look similar to the Trump economic agenda with some exceptions.

The dollar, which had already been trading lower against most major currencies, remains under pressure.

Draghi sends euro soaring

Mario Draghi roiled markets this morning, taking a 180 on the inflation outlook. By supplanting deflation risk with reflation risk, he sent the euro soaring to 10-month highs.

“The threat of deflation is gone and reflationary forces are at play,” said Draghi at the ECB Forum in Portugal on Tuesday.

The central bank has come under increasing pressure to start tightening monetary policy. Inflation has picked up, growth resurfaced, and political uncertainty has all but dissipated, fueling the argument to scale back stimulus from the ECB.

While this marks a departure from Draghi’s dovish stance in recent months, he is not ready to signal any changes to policy quite yet. Draghi said support will need to “remain in place” as rising inflationary pressures are “not yet durable and self-sustaining.” He said the central bank can support the recovery by adjusting policy – “not in order to tighten the policy stance, but to keep it broadly unchanged.”

Yet, as Draghi expressed confidence that inflation in the Eurozone would ultimately pick up as growth expands, this could suggest that tighter monetary policy is ahead.

Business as usual

At The Times CEO Summit this morning, Brexit minister David Davis moved to reassure the business sector. Promising to “intensify dialogue with Business over Brexit,” Davis threw his support behind Chancellor Hammond – the UK finance minister.

Davis said he was entirely aligned with Hammond in prioritizing jobs and the economy, “so much so I didn’t think that I needed to say it.”

On the Prime Minister’s announcement of giving long-time EU migrants “settled status”, Davis says there will be “no impact” on businesses from Government’s introduction of “settled status”, but immigration will be brought down.

All may not be well on the Western Front. Consumer confidence plummeted after the general election, according to a recent study. A snap election earlier this month produced no clear majority for any political party in the UK, forcing Conservatives to form a coalition and allow them to push legislation through. Research from YouGov and the Centre for Economics and Business Research indicates that consumer confidence fell from to 105.2 from 109.1 in the week following the vote.

EURUSD: Euro climbed to post-election highs, but has backed down slightly. If we continue to see a more aggressive ECB later in the week, we could see a sustained move higher.

GBPUSD: Sterling taking advantage of a weaker dollar as the Brexit Minister tried to reassure UK businesses.

AUDUSD: Aussie dollar higher with commodity prices, though it has given up most overnight gains against the greenback.

USDCAD: The recovery in oil prices is driving Canadian dollar higher, with USC/CAD down 0.35% this morning.

USDJPY: The yen still trading slightly weaker against the USD as investors continue to move their funds out of safe haven assets.