European officials agreed the second Greek bailout yesterday but insisted that Spain do more on fiscal consolidation. The Spanish deficit is now to reach 5.3% of GDP this year from the 5.8% offered by the Rajoy administration. This saw the EUR strengthen yesterday but it is slipping in this mornings trading.
We look for further adjustment in the UK trade position. The sharp fall in oil and gas extraction does provide a downside risk to exports, but it seems that the weakness of sterling is now seeing import substitution accelerate so the total trade deficit should remain relatively modest in January, with a record service sector surplus continuing to partly offset the much larger goods deficit.
The German ZEW survey for March is expected to show economic sentiment index reaching its strongest level since March 2011 with the headline index rising to 10. If confirmed then it would leave the German economy tracking an annual growth pace of 3% implying that the eurozone’s largest economy will escape a technical recession.
The FOMC (Federal Open Market Committee, similar to our MPC) meets tonight and although no-one believes that there will be any change in policy, it will be interesting to see whether there are any dissenters. Lacker wanted the time period over which rates were to be kept an exceptionally low levels removed in January and stronger data since then are likely to see him repeat that demand this month. Indeed, while no change in policy is expected we do believe that there could be a change in tone to reflect the strength of recent data releases. This could give the dollar a further boost.
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