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Hard Brexit fears resurface

Hard Brexit fears resurface

Construction PMI data for the UK in December printed the strongest reading since March last year, with an increase from 52.8 previously to 54.2. Over the Christmas period there were mixed reports from retailers, although consumer lending data results were in line with expectations and consumer spending remained firm.

Sir Tim Barrow has swiftly taken the EU ambassadorial reins from Sir Ivan Rogers. The UK markets were calmed slightly following the news, however the fears of “Hard Brexit” are returning. The Pound fell back to around 1.1700 against the Euro as part of a wider correction, but pushed above 1.2300 against the Dollar.

The Eurozone services sector PMI for December rose to 53.7, up from a preliminary reading of 53.1, which underpinned confidence in the European outlook and indicated increased inflationary pressures. Eurozone flash December CPI inflation increased to 1.1% from the previous month’s 0.6%, which was slightly above the expected rate of 1.0% and the highest rate since September 2013.

There was also a small increase in the core inflation rate to 0.9% from 0.8% previously. The data maintained some speculation that the European Central Bank (ECB) would scale back monetary easing during 2017. Eurozone bond yields continued to edge higher which helped support the Euro, moving back above the 1.0450 level against the Dollar.

In the US, the Federal Open Market Committee (FOMC) December monetary policy meeting minutes showed that the committee is concerned over the considerable uncertainty surrounding the Trump administration and policies, especially the fiscal ones. Investors will be heartened by the FOMC’s rhetoric and hawkishness for 2017 in anticipation of rising inflation and a stronger dollar.

The Greenback failed to rally after the minutes’ hawkish tone, instead losing further ground against major currencies, hurting US yields and the Dollar Index as a consequence. The ADP report and the ISM Non-manufacturing will be the salient US data releases today, with Non-farm Payrolls tomorrow.

Data to watch: 10am EUR Producer Price Index (Nov). 12.30pm EUR ECB Monetary Policy Meeting Accounts. 1.15pm US Initial Jobless Claims, ADP Employment Change. 2.45pm US Markit Services & Composite PMI. 3pm ISM Non-Manufacturing PMI.

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