
FX Commentary - December 11, 2017
Optimism over US tax reforms carried the dollar to its best week in over a month against a weighted basket of peers last week as the senate passed its version of the tax bill. The latest progress gives the Trump administration some breathing room, especially as Special Prosecutor Robert Mueller continues pushing his investigation closer to Trump’s inner circle. This week, attention shifts from politics to central banking where the Federal Reserve is the first of several major central banks to conduct its last meeting of the year. After last Friday’s jobs report modestly surprised to the upside, expectations remain on track for the Fed to raise rates by a quarter of a percent for the third time this year. Yet, the issue going forward remains meddling inflation which the Fed has begun reconsidering as more than a “transitory” factor. While the recent jobs report showed a strong headline number, the average wages component came in soft at 0.2% growth, while last month’s wages growth was revised down to -0.1%. The absence of wage-push inflation and how the Fed takes this into account with respect to its longer term interest rate path will be an important focus for markets after the Fed’s meeting Wednesday.
Following the Fed the European Central Bank (ECB) and the Bank of England (BoE) hold their respective policy meetings this Thursday. Unlike the Fed, the ECB is expected to stand pat after announcing at its last meeting that it would begin reducing the size of its stimulus next year. The euro will likely take its cues from how policymakers choose to weigh between optimism and caution, an act which has proven difficult for ECB President Mario Draghi on occasion this year. Generally supportive data this year will perhaps give the ECB some room to speak optimistically, and a set of economic surveys and industrial indices out of the Eurozone and Germany released this week will add further context for the bank’s views. In similar fashion, the Bank of England is not expected to make any moves this coming meeting after raising rates during its last meeting. Despite being the first rate hike made by the bank in a decade, the move was seen with little conviction by markets given the backdrop of economic data. Measures on inflation, employment, wages, and retail sales this week will provide vital updates on the health of the UK’s economy since and will be used to measure the bank’s statements. Aside from the BoE meeting, Brexit developments will continue to be a key driver for the pound after the EU and UK most recently reached a deal to move to phase 2 of the talks.
Preceding this week’s central bank action, the Bank of Canada and Reserve Bank of Australia each held their final policy meetings of the year last week. After raising interest rates twice this year, the Bank of Canada began taking on cautious overtones with respect to its economic outlook and future policy. The bank continued to keep this stance by focusing on moderating growth, trade and geopolitical risks, and slack in labor markets during last week’s meeting. With no immediate plans for further tightening, the bank will likely take some time to assess the developing impact of its two rate increases and continuing trade uncertainties. Meanwhile, the Reserve Bank of Australia left its policy unchanged, signaling as it often has this year that it is in no hurry to do so. The bank highlighted improving global conditions but noted that underlying inflation will remain below the target range of 2 to 3 percent throughout next year, suggesting current interest rates to remain for some time.
Sources: Bloomberg, Wall Street Journal, Reuters, Barclays, Bank of America, Econoday, 4cast
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