Capital Markets: "Dollar Given a Reprieve"

From Marc to Market:

After extending its recent slide yesterday, which the US markets were on holiday, the dollar is firmer against all the major currencies and most of the emerging market currencies. There does not seem to be macroeconomic developments behind the dollar's stabilization, and the gains are quite minor, suggesting a pause in the downtrend rather than a reversal at this juncture. That said the extent and duration of what appears to be little more than a technical adjustment is the key to the near-term outlook.

The euro rose for the fourth session yesterday and approached $1.23. Today, the pullback took place mostly in the European morning. Initial support is seen in the $1.2180 area. News from the eurozone is light. Germany and Italy confirmed their December inflation readings ahead of the aggregate report tomorrow.

Much of the discussion of the ECB stance, including the record from the December meeting that the market read so hawkishly, was before the preliminary release of the December CPI. Recall that it was softer than expected. The headline eased to 1.4% from 1.5%, but it was the flat core at 0.9% that was most disappointing. Recall that the core measure bottomed at 0.6%. The core rate jumped to 1.2% in early Q2 17 and returned to it in early Q3, but has returned to the middle of its four-year range.

The UK reported December prices today. Headline CPI was in line with expectations, rising 0.4% on the month, which saw the first decline in the headline rate (3.0% from 3.1%) in six months. The core rate eased a little more than expected. The 2.5% year-over-year rate is the lowest in five months. Service inflation also fell to 2.5%, which is a nine-month low. Given the re-weighting of airfare, it may be premature to read too much into today's report, but many, including ourselves, continue to look for the past decline of sterling to drop out of the comparisons, which would point to a general easing of price pressures. Also, a favorable dynamic was apparent in producer prices, where input prices slipped more than expected while output prices were firmer than expected, which speaks to margins.

Separately, news reports suggest that the EU has toughened its demands for a transition deal. The negotiators were given more specific terms that will complicate the talks. The UK is being asked to adhere to EU rules on immigration and rights of EU citizens to live in the UK during the transition, as well as agree to no new trade agreements and no renegotiating fishing rights during the transition. In essence, these latest conditions appear to make more concrete what a "standstill" transition means....MORE