The U.S. Dollar strengthened following a day of choppy trading as market participants looked for guidance from Fed speakers and digested the reality of the first day of Brexit negotiations. The developments overnight improved the “buck” as European economic confidence is down and insider sources from the European Central Bank informed that officials are not in any way determined to abandon their accommodative approach to monetary policy.
Meanwhile in the U.S., Boston Fed President Eric Rosengren went beyond the call of duty by exclaiming that three more rate hikes would be appropriate this year, being way more optimistic than the rest of his peers who have still vowed to produce two more increments in 2017. The Federal Funds Rate is now at 1.0% and chances of it closing above 1.5% by December are at 20.0% based on traders’ bets.
Gross Domestic Product for Q4 registered at 2.1%, revised upwardly from 2.0% originally and Personal Consumption surprised with a reading of 3.5% over the estimated 3.0%. Additionally, the Fed’s preferred measure of inflation, Core Personal Consumption Expenditures (CPE) rose 1.3% beating its 1.2% expectation. As always, Jobless Claims remain near a four-decade low. Clearly, things look great on paper and with so much rising on political upheaval in Europe the greenback is on the rise at the moment. Other Fed members will speak today, we’ll watch mainly for New York Fed’s William Dudley at 10:30AM.
The Euro is down; falling sharply as deflationary pressures seems to be back on the table as the European Central Bank considers its policy options. For years, the economic recovery in Europe has necessitated multiple injections of intervention by the ECB, but quantitative easing will come to an end this year.
Nevertheless, German and Spanish Consumer Prices registered lower than most analysts predicted which puts pressure on the central bank to maintain its current loose approach. If there is a chance of hiking rates, it would be left for next year, especially with the downside risks at play politically.
Sterling remained stagnant despite the historic and momentous occasion that was invoking Article 50 to start the divorce proceedings with the EU. The United Kingdom has a lot to lose as trade with the EU represents close to 15.0% of British GDP.
More importantly, as proud as Brexiteers may have felt, a letter by the UK with the intent to promote a trade deal tied to security was immediately rejected by European lawmakers. Prime Minister Theresa May already is getting a taste of what negotiations will be like: lots of No’s to her proposals and a firm stance by EU officials to foment a sense of regret. We maintain a dovish forecast for GBP in 2017.