December rate hike called into question

The minutes of the latest FOMC meeting were released yesterday and provided traders a glimpse into the future of the Fed once Jerome Powell takes over from Janet Yellen as Fed. Chair. Powell’s confirmation by the Senate is imminent and it has been announced this week that once he is in place, Mrs Yellen will leave after a long and distinguished career which has spanned four Presidents.

The dollar index has reached close to a one month low following the release of the minutes as they illustrate the concerns of members about the future path of inflation. There is still a real possibility of a rate hike next month although it is far for certain but three hikes in 2018 now look a remote possibility as price increases look like remaining benign.

The dollar fell against the Euro reaching 1.1828 and continuing to weaken overnight although a test of the resistance at 1.1880 is unlikely without further impetus from the common currency. The Euro is the major constituent of the dollar index which consequently it fell to 93.24 and has reached 93.16 overnight. Durable goods orders fell by 1.2% in October which added to the weakness of the dollar.

Hammond’s sleight of hand

In his Budget yesterday, Philip Hammond, the Chancellor of the Exchequer, Philip Hammond predicted that growth in the U.K. would fall to 1.5% until 2021 as the effect of Brexit on trade and investment takes hold. This was had barely any effect on sterling which traded in a very narrow range versus the Euro. It had a better day against the dollar which has its own headwinds.

This was the least eagerly awaited budget for years as there was never any question that Hammond would be able to provide any great giveaway to the country, direct taxes were unlikely to be changed and the usual suspects of petrol, alcohol and tobacco were likely to see insignificant increases in taxation.

The only incentive to the country was in the shape of a cut in the tax paid by first-time buyers of property but this was criticized by the opposition as a cosmetic change when real investment was necessary.

Hammond adopted the old political trick of getting the bad news out while attention is elsewhere. That is certainly the case for the U.K. now since if “it ain’t Brexit, it ain’t news”. The expectation of the announcement of the increase in the amount the U.K. is going to offer to settle the “divorce bill” as well as proposal for the Irish border and EU citizens issues are awaited with the EU summit on14/15 December.

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Merkel taking her time

The German constitution allows the winner of the largest number of votes an indefinite period to form a Government with the President only intervening if there is seen to be an impasse. Angela Merkel remains at her desk and her ministers continue to administer the decisions of the Reichstag and this can continue for as long as Mrs Merkel likes.

Wolfgang Schaeuble, the former Finance Minister, now President of the Reichstag, and Merkel’s biggest supporter was vehement in his defence of the process yesterday playing down concerns about German politics being “in disarray. The Euro has suffered from the lack of clarity, but traders have short memories and have moved onto the next issue.

Merkel favours fresh elections, prepared to take a chance over the “rise of the right” since she could easily be hobbled by trying to manage with a minority Government relying on support from smaller parties on a case by case basis. The Greens have already set out their stall demanding closure of coal mines and the adoption of a radical clean and sustainable energy policy. There is little doubt that until the constitutional issues are completed Merkel will not be able to devote her attention to Europe and resume her place at the “head of the table”.

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