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As Italy stabilises, it’s all about the interest rates

As Italy stabilises, it’s all about the interest rates

The UK trade data showed that the deficit narrowed to £9.7 billion for October after record export data, but an upward deficit revision to £13.8 billion for September had reduced confidence in the quality of the data released, and consequently the trade outlook.

There was an increase in consumer inflation expectations to 2.8% for November, up 0.6% from the previous quarter, due to the sudden price increase in food, oil and other commodities following the EU referendum. Mark Carney’s Thursday press conference will be watched for any further hints of rate hikes next year to negate the inflationary impact. The Pound edged lower due to a stronger Dollar, failing to hold above 1.2600, while advancing above 1.1905 against the Euro.

The US consumer confidence index strengthened to 98.0 for December from 93.8. This is the highest figure since early 2015. It was caused by optimism surrounding the probable growth-boosting policies under a Trump Administration.

Expectations that the Fed will raise the interest rate by 0.25% at this week’s policy meeting are as high as they can be. The market’s main focus on Wednesday evening will be the Federal Open Market Committee (FOMC) statement and Yellen’s following press conference. There is some expectation of a dovish statement, especially as there are concerns that the strong Dollar will have a damaging impact on both the US and global economies.

There was also a decline in one-year inflation expectations to 2.3% from the previous 2.4% which will tend to dampen expectations that the Federal Reserve will need to tighten monetary policy aggressively next year.

The Euro struggled with any kind of price recovery on Friday’s open. By the time most of us were looking forward to elevenses there was renewed selling pressure from further negative sentiment related to the European Central Bank (ECB) press conference and asset purchase changes on Thursday afternoon. German trade surplus figures for October gave no impetus, printing slightly weaker than expected as exports failed to make much headway.

The single currency was also undermined by fresh concerns surrounding Italian bank Monte dei Paschi after the ECB refused to allow additional time to secure a capital-rescue package. Italian Foreign Minister Paolo Gentiloni has replaced Matteo Renzi as Prime Minister providing some political stability and continuity. Monte dei Paschi, one of several big Italian banks struggling with a heavy burden of bad loans, has since pledged to raise EUR 5Bn from investors by offering shares in place of their bonds.

Data to watch: 6pm US 10 year note Bond Auction. 7pm US Monthly Budget Statement (Nov).

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