The Dollar’s recent rally appears to have run out of steam. The US government has struck a tentative tax deal with opposition Republicans whereby Obama will partially accede to Republican wishes to extend the Bush government tax cuts – implemented in 2001, worth some $800bn and due to expire December 31st – by two years. The quid pro quo is that Republicans back Democrat demands for a 2% tax cut for working families (payroll tax cut worth $120bn) a $56bn extension to unemployment benefit and an extension of the earned-income tax credit. All told the Democrat wish list is worth just over $200bn and together with the $800bn Bush tax cut extension provide the economy with a prospective additional $1trln fiscal stimulus.
An environment of generally greater risk appetite is also hurting the Dollar and benefitting the Euro following overnight news of surprisingly strong Australian employment data, which saw the AUD jump nearly 1%. There is little in terms of fresh updates on either the Eurozone or US economies today, however in the aftermath of last Fridays’s disappointing non-farm payrolls report, markets will be keeping a close eye on weekly jobless claim figures.
Sterling continues to be buoyed by good news on the UK economy, though it has lost some of yesterday morning’s strong gains against the Euro. Following Tuesday’s positive manufacturing report for October, the December CBI industrial trends showed orders at their highest level in more than two years. Today sees the release of trade data for October, as well as the Bank of England Base Rate announcement. No policy changes are expected, with the market perhaps more keenly anticipating the subsequent meeting minutes for an insight into the committee’s thinking going forward.
Markets are still debating whether or not the BoE could engage in a new round of Quantitative easing early next year. However, recent upside surprises in terms of GDP data, allied with stronger inflation figures suggest that it is unlikely (though not impossible). Regarding base rate, while inflation is expected to fall over the medium term, recent trends are likely to unnerve some MPC members, as the minutes of today’s meeting may attest.