ews that a grand coalition between German conservatives and social democrats was being explored after the collapse of four-party talks buoyed the common currency, as did the unexpected rise of business activity indices to seven-year highs. Other European currencies, like Sterling, rose on the Euro’s coattails. The Dollar was not helped by the inability of US interest rates to break higher. The week’s loser was the Turkish Lira, as investors lose trust in the central bank’s willingness to deploy monetary tools to fight inflation.

A lot of economic data is on tap for this week. PMI business activity indices, third quarter GDP growth and, most crucially, inflation data will be released. We focus on the US consumer prices and Eurozone CPI flash estimates, both out on Thursday.

Major currencies in detail

GBP

The 2018 Budget was out last week, and with it some rather gloomy expectations on future growth, productivity, and pay for UK workers. However, currency markets entirely ignored the news.

The focus continues to be the Brexit negotiations with the European Commission. The next key date is the meeting of the European Council on 14th-15th December. If European officials deem that sufficient progress has been made to move to the next stage, the odds of a hard Brexit lessen considerably and Sterling should start to converge to its higher equilibrium value. However, the outcome of the meeting remains very uncertain and we expect Sterling volatility to increase leading into it.

EUR

An extremely strong set of PMI business activity indices for November further confirm that the Eurozone economy is ending the year on a very strong note. The composite index rose to within sight of its all-time highs. While the PMIs have been somewhat overshooting actual growth data for the past couple of years, the strength of recent data releases are undeniable.

However, ECB policy should remain focused on the disappointingly low levels of inflation. This week’s release of flash November CPI figures is perhaps the most critical data from the Eurozone, ECB meetings excepted. The core number excluding volatile food and energy components should remain at or below 1%, guaranteeing that negative interest rates will remain with us for the foreseeable future.

USD

Very little news came out of the Thanksgiving holiday week in the US, as usual. The minutes of the latest Federal Reserve meeting confirmed that an interest rate hike in December is a near certainty, but rate markets continue to be skeptical about the chances of sustained hikes beyond that.

Aside from the release of personal consumer expenditures inflation data on Thursday, the main driver for the US Dollar will be headlines on the progress through the US Congress of the tax cut package.