Last U.S. GDP post before Trump takes the helm...

Week Commencing Monday 19th December 2016

 

US: Fed funds up 25 basis points despite Trump win!

The US Federal Reserve on Wednesday raised interest rates for the first time in a year, and only the second time since the 2008 financial crisis.

The bank announced a 25 basis point increase in the benchmark rate from 0.50 percent to 0.75 percent. The news immediately edged the US Dollar higher, with all majors losing ground against the Greenback.

Yellen also set out a faster pace of rate increases next year than was previously expected, with the FOMC stating it expects rates to increase by a further 0.75 percent over the course of next year. The unanimous decision to raise rates, the first time in months that the 10 members of FOMC had all agreed on policy, came at the end of the committee’s first rate-setting meeting since the election of Donald Trump as the next US president.

Trump and Yellen are not friends, and the President-elect has stated he is not seeking to extend her term when it comes to an end in 2018.

GREECE: Pre-Christmas bonus payment sends Eurogroup mad!

International lenders said on Wednesday that they were considering suspending an agreed short-term debt relief offer to the country after Prime Minister Alexis Tsipras unexpectedly announced the payment.

Lawmakers then subsequently approved the measures late on Thursday, adding an additional EUR 617 million burden to the public finances. In a joint statement, representatives from the European Central Bank, the European Commission and the European rescue fund said they would now decide whether to uphold a Eurogroup decision granting Greece short-term debt relief earlier this month.

 

FX Forecast

EUR/USD continues to track to the downside on the back of the FOMC interest rate decision last week, with a new low established at 1.0365. Initial bias remains to the downside this week, with heavy EUR support expected around parity. We do not expect a breach this week, especially with the Christmas break approaching, however further losses are to be expected.

GBP/USD continued to drop on the back of the FOMC rate increase, with bias remaining to the downside as with EUR/USD. Sterling appears to have support however, so declines should be more muted than versus the Euro. We expect Sterling to resist at 1.2301.

GBP/EUR remains mixed, with bias slightly in favour of Sterling as we approach the end of the year. 1.20 remains a key level, although with the previous breach in mind, we expect only minor resistance at this level. Expect continued moves to the upside as we draw towards the holiday season.

 

Economic Calander for the Week

UK Data:

We expect the current account and Final Q3 GDP to be the highlight of the Sterling week on Friday, with reasonably strong results expected. We expect the account to remain in the red, however to reduce the amount from -28.7 billion to -28.3 billion.

The GDP amount is unlikely to change and be confirmed in at a strong 0.5 percent for the third quarter. Finally, we expect Wednesday’s PSNB figure to show an increase in public sector borrowing from 4.3 billion to 11.5 billion.

US Data:

We have a busy week for the US ahead, with unemployment claims, Final GDP and Core Durable Goods all coming out on Thursday. We expect Core Durable Goods to expand to 0.2 percent on the month as retailers gear up for the festive period. GDP should edge further to 3.3 percent annualized from the 3.2 percent previously estimated.

Finally, we expect unemployment claims to edge higher to 255k from 254k last month. All in all, a positive week for the Dollar.

EU Data:

We have little in the way of European news outside the usual geo-political space. We expect German Ifo Business Climate to edge up on the month, potentially to hit 111.0 versus last month’s 110.4 print.

 

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