peaking at an event in New York on Wednesday, Powell stated that the current policy rate of 2-2.25% was ‘just below’ the estimated neutral level of rates, implying a limited need for additional hikes. The Dollar, however, took this development remarkably well, even as risk assets worldwide celebrated the news with rallies in equity and credit markets. A possible explanation for the Dollar’s relatively solid performance in spite of falling Treasury yields may be the disappointing news from elsewhere, in particular the soft inflation readings from the Eurozone.

The focus this week will shift back to economic releases. As per usual, the monthly US payrolls report out on Friday afternoon will be key. We will also be paying close attention to second-tier Eurozone releases for clues regarding a recent slowdown in aggregate data. The Brexit debate in the UK Parliament should also provide plenty of volatility for Sterling.

Major currencies in detail

GBP

All economic data continue to be ignored in the UK, and the Brexit debate remains the only thing driving the Pound.

While the EU agreed to the draft agreement last month, the Pound failed to benefit as all now depends on getting the deal through parliament. The vote is scheduled for 11th December, although we expect the tally of yes and no’s to start this week and again drive most of the action in the Pound.

See attached for our special report on how the government Brexit vote could impact Sterling.

EUR

Economic news out of the Eurozone continued its disappointing streak last week.

Core inflation pulled back from 1.1% to 1.0%, showing no sign of establishing a trend towards the ECB’s target of ‘close to, but below’ 2%. Right now, this critical indicator continues to be stuck in the lower bound of its range of the last seven years. We now think that our timetable for ECB hikes in the third quarter of 2019 is too ambitious and will be revising this in the near future.

The Euro didn’t suffer as much as may have been expected from this continuation of the soft data of the past few weeks, since the Federal Reserve also took a dovish turns in its communications last week.

USD

Few macroeconomic releases of note meant the spotlight was on Federal Reserve communications last week.

Speeches from Chair Powell and Richard Clarida, as well as the minutes of the last Fed meeting, suggest that Fed officials think rates are not far from neutral levels. While a December hike is almost guaranteed, markets now expect no more than one for the entire year of 2019. We think this is a realistic assessment, as there are no inflationary pressures to be seen in the US and the Fed can now afford to sit back and wait for further data before taking action. As a result, we think there is room for the US Dollar to unwind some of the gains it has notched up since September.