The euro gained some strength against the dollar yesterday as the market digested the ECB’s meeting accounts from their December 14th meeting. The upward jolt was on the basis that the ECB’s communications policy will point to a further move towards normalisation sooner rather than later. The Governing Council (GC) confirmed that the economy had strengthened further since the previous meeting in October. In fact, the upward revision to the ECB’s growth outlook had been among the greatest since its formation. A remark made at the GC meeting was that while economic conditions were favourable, the stance of monetary policy remained in a crisis configuration and that a ‘gap’ (i.e. an inconsistency) was beginning to emerge. It was argued that though inflation had not yet responded to the more buoyant economic conditions, the Governing Council (GC) needed to be ‘patient and persistent’ with its monetary policy. Even so, although it was considered that a shift in communications was premature at this point, they needed to evolve gradually to reflect the economic conditions. Indeed the language could be revisited early in 2018. Moreover communications should be adjusted gradually, which implies that forward guidance will become more important over the course of this year. In summary, the upbeat tone caught markets by surprise, as indeed have BoJ and Riksbank developments over the past couple of sessions and this saw the euro strengthen back over $1.20.

Bill Dudley, the New York Fed chief, spoke last night outlining his thoughts on the recent US tax cuts and the risk of an overheating US economy. He believes this reinforces the case for continued gradual interest-rate rises as tax boosts would deliver an “extra boost” to the economy on top of the current above trend growth and low unemployment. Alongside this, financial conditions had become more supportive, even though the Federal Reserve had attempted to moderate this through tighter monetary policy. Mr Dudley said: “This suggests that the Federal Reserve may have to press harder on the brakes at some point over the next few years”. CPI inflation data for December out later today and will be closely watched.

Back home, Nigel Farage has said he could be coming round to the idea of a second EU referendum. Even though Mr Farage is no longer the leader of UKIP and the party has no seats in Parliament, it seems he remains an influential figure with his own radio show and ties to US President Donald Trump. He has come under fire from members of his own party however as they believe that the UK is already taking far too long to extract itself from the EU. Farage believes a second vote would once and for all settle the issue and end the “whingeing” of pro-EU politicians.

The day ahead

The biggest releases today come from across the Pond, as the US figures include the Consumer Price Index (CPI) and Retail sales for December. CPI is a key inflation indicator and a higher reading is normally seen as positive for the dollar. The figure today is expected to be marginally soften month-on-month. Retail Sales are also expected to be down from last month’s reading of 0.8%. We also have the final two Fed speakers of the week; Philadelphia chief Patrick Harker and Bank of Boston President Rosengren will both be delivering speeches today. 

Thought of the day

If you thought that the empty seats around the office are an indication that some of us are struggling to beat the January blues as the long nights, bad weather and illnesses set in, you would be correct! A recent study has suggested that Britain will be in the grip of a flu epidemic by the end of the month if the virus continues to spread at the current rate. The most serious strain of the virus, dubbed ‘Australian flu’, is of particular concern to health bosses due to fears that current vaccinations aren’t providing effective protection. The Investec dealers for the most part are fighting fit and have even embarked on a weight loss challenge for the next 6 weeks to start 2018 on the right foot! If you’d like to discuss kicking off your 2018 FX policy in style, call your Investec dealer today to discuss what strategies could work for your business or even just to get an update on who’s leading the challenge!