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The EU’s chief Brexit negotiator, Michel Barnier, sent GBP plunging and then soaring. He said there was a “deadlock” in the talks over the question of how much the UK would pay the EU to leave. But later, the German newspaper Handelsblatt cited him as saying that the EU could offer Britain a two-year transition period during which Britain would stay in the EU’s single market if Britain agreed to settle its financial obligations with the EU. That would mean additional time to hammer out the details of the separation and reduce the odds of a “hard Brexit,” where Britain just crashes out of the EU without any agreement.


Reports that the ECB is considering cutting its monthly bond purchases in half from January while keeping it going for at least nine months didn’t have much impact when they first surfaced, but since then EUR has weakened further. Since the ECB has said it won’t start raising rates until it has ended the bond purchases, the long delay until then means rates will remain lower for longer, which is negative for EUR.

NZD rose as the market anticipated that New Zealand First Party would complete talks on a coalition government over the weekend. It also benefited from some pressure on AUD/NZD from the Reserve Bank of Australia (RBA) Financial Stability Report, which said regulatory measures are constraining some borrowers, meaning there’s less need for interest rates to rise to control borrowing.
CAD on the other hand fell as the US proposed a “sunset clause” for NAFTA deal, meaning NAFTA would expire every five years unless all three parties agreed to keep it going. This would be a disaster for anyone considering an investment that needs NAFTA to continue. Lower oil prices and a fall in new house prices didn’t help the currency, either.

Today’s market

Once again, nothing major during the European day. The final German CPI will be coming out, but it usually isn’t any different than the preliminary version.

The US CPI on the other hand is a big, big deal. It’s expected to accelerate both at the headline level and the core level. Energy prices will play a big role in pushing prices up as gasoline prices rose in the wake of Hurricane Harvey in Texas, whereas the seasonal adjustment assumes prices fall during this period.

Although this isn’t the inflation measure that the Fed officially targets, it seems that people pay more attention to this one than to the official target (which is the core personal consumption expenditure deflator). With the headline figure leaping over 2% and core inflation accelerating as well, it would seem to confirm all the prognostications from various Fed officials that inflation is likely to hit their target level.

At the same time, US retail sales are expected to soar, at least at the headline level. The figure there is temporarily inflated by soaring gasoline prices (and therefore gasoline sales) as a result of the hurricanes. Auto sales also rose as people started to replace some of the 300k autos damaged in the Houston flooding. And even after excluding autos and gasoline, they’re forecast to rise at an above-trend rate owing to sales of building materials. The increase in retail sales should also prove positive for the dollar.

Consumer confidence is expected to be more or less unchanged. In combination with the other solid reports from the US, it would probably confirm to the market the resilience of the US economy and would therefore be dollar positive.

There are a number of speakers in the US afternoon. ECB Governing Council Vice President Vitor Constancio will participate in a panel discussion on “The European Spring?”.

Two of the FOMC’s doves – both voters — speak today, but since both have spoken recently anyway, I don’t expect their comments to be market-moving. Chicago Fed President Charles Evans discusses current economic conditions and monetary policy in Wisconsin. He spoke on Wednesday and said, “I’m thinking it’s going to take a little bit longer to get up to 2% than many people. We might need a continued accommodative stance…”  Dallas Fed President Robert Kaplan will appear in a moderated Q&A session in Boston. He was at a similar event on Tuesday, when he said he wanted to see more signs that inflation was accelerating before raising rates.

Fed Governor Jerome Powell was scheduled to be the keynote speaker at the Boston Fed’s annual economic conference, but cancelled a few days before. Fed spokesmen said that the cancellation is routine, but there’s bound to be some speculation, because Powell is thought to be one of the front runners for head of the Fed when Janet Yellen’s term finishes next February.

On Sunday, the Group of 30 holds two high-powered events in Washington. Unlike the G7, G10, or G20, the G30 is a public and private-sector organization that brings together central bankers, the heads of various financial institutions, and some academics to discuss financial and systemic issues. First there’s a panel discussion on “The Global Economy: Prospects for Broad-Based Growth,” featuring Fed Chair Yellen, PBOC Gov.  Zhou, BoJ Gov. Kuroda, and ECB VP Constâncio, After that there’s a panel discussion on “Financial Regulation and Economic Policies to Avoid the Next Crisis,” featuring US NEC Director Cohn, RBI Gov. Patel, and Bundesbank President Weidmann, and Banco de Mexico Gov. Carstens.

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