EuroDollar parity for Christmas?
Nicola Sturgeon’s comments on a second Scottish “UK membership” referendum undermined Sterling sentiment yesterday morning, bringing the Pound down to 1.1840 against the Euro and 1.2360 against the Dollar. Theresa May’s comments that the UK could contribute to the EU budget after it leaves the bloc underpinned sentiment slightly and the Pound reversed losses against the Euro.
The Financial Times reported yesterday that EU Brexit negotiators are insisting Britain agrees to its European divorce settlement before Brussels offers any transitional deal. The Scottish National Party is due to announce its plans for Scotland to maintain single-market access after a UK EU exit.
With low liquidity there will be the risk of choppy trading conditions and there will also be year-end position adjustment which will increase the risk of sharp Sterling moves.
The US PMI services-sector index underperformed with 53.4 for December from 54.6 previously, although the underlying components were generally firm with the strongest reported employment gain for nine months. Expectations of stronger US economic growth, led by President-elect Donald Trump’s fiscal stimulus, and a projected 3 rate hikes next year might continue to lend support to the US Dollar. The Greenback slipped against majority of its peers in thin trading conditions yesterday as investors took profit following the Fed’s rate hike. The Fed’s Yellen directed her speech yesterday towards new graduates, but she also commented that the US job market was at its strongest for 10 years and there was evidence of upward pressure on wages.
The Italian government approved plans to raise additional borrowing to underpin the banking sector if needed. The Euro-zone labour costs increased from 1.0% to 1.5% in the year to the third quarter; suggesting inflation pressures are rising. The Euro shrugged off better-than-expected German IFO business confidence index which were the strongest reading since February 2014, slumping below 1.0400 against the Dollar after the European market shut.
The German IFO business confidence index rose to 111.0 from 110.4 which was higher than consensus forecasts and the strongest reading since February 2014. There was further notable strength in the construction sector while the Bundesbank expected a stronger German economy for the fourth quarter. There was an increase in Euro-zone labour costs to 1.5% in the year to the third quarter from 1.0% previously which suggests an underlying gain in inflation pressures.
Data to watch: 7am German November Producer Price Index, YoY & MoM.