Euro vulnerable and BoE announces vague plans to do nothing in 2017
UK retail sales data hit expectations with a 0.2% monthly increase, but the annualised rate dropped to 5.9% from 7.2% previously as overall spending held firm.
As expected, the Bank of England (BoE) held interest rates at 0.25% and the forward guidance revealed a fairly neutral stance. Sterling’s recovery could lead to a slightly weaker than expected increase in inflation and again we heard warnings that there was only limited tolerance to inflation overshooting the 2% target. The Monetary Policy Committee (MPC) also expects that the economy will slow over the next few months as real income growth falls.
There were reports that the UK could face a £50bn Brexit bill. Underlying uncertainty continues as there are many pre-negotiation claims doing the rounds as well as persistent doubts as to whether a quick exit deal can be reached.
Dollar strength dominated Sterling during the day with the UK currency sliding to lows below 1.2400 while the Euro couldn’t break below 1.1900 against the Pound.
There was a strong reading for the Eurozone PMI manufacturing index with a 68-month high of 54.9, although there was slower growth in the services index. The weaker Euro will contribute to firmer demand and rising inflation which will have an impact on future European Central Bank (ECB) monetary policy.
The Euro broke below 2015 lows, hitting around 1.0460 against the Dollar. This triggered a fresh round of selling and a slide to 13-year lows below 1.0380, which naturally lead to increased parity speculation. However, there was a modest correction and markets continue to analyse any comments from Fed officials.
US inflation rose 0.2% in November, with the annual rate increasing to 1.7% from 1.6%. The core inflation printed at 0.2% with the annual rate holding at 2.1%. Jobless claims declined to 254,000 in the latest week from 258,000 previously, maintaining confidence in the labour market. There was an increase in the Philadelphia Fed index to 21.5 for December from 7.6 the previous month. There was also an increase for the New York Empire index which will boost optimism over the growth outlook. Post-election optimism boosted the NAHB index to an 11-year high and the PMI manufacturing index edged higher, but export orders were weak.
Data to watch: 10 am EUR Trade Balance n.s.a. (Oct), EUR Consumer Price Index – Core (YoY) (Nov) . 6pm USD Baker Hughes US Oil Rig Count.