Market Review – Fundamental Perspective 12 January 2018

US FED's William Dudley spoke on Thursday at the Securities Industry and Financial Markets Association in New York. 'Over the longer term I am considerably more cautious about the economic outlook,” said Dudley, 'Keeping the economy on a sustainable path may become more challenging,” due to the risk of 'overheating'. He made the point that there is a strong case to keep gradually raising rates and that the forecast for 3 rate hikes this year is a reasonable starting point. He said it could go faster or slower depending on data and he wants to achieve 2% inflation before shifting goal higher. He also said that 'Tax cuts will come at a cost, pose challenges for Fed.' Tax cuts, he said, made him considerably more cautious about the longer-term economic outlook and the cuts give a short-term boost to the economy but pose serious long-term risks. He expects 2.5% to 2.75% GDP growth, inflation hitting 2% in the medium term and unemployment down below 4% in 2018. Eurozone Industrial Production w.d.a. (YoY) (Nov) was released with a number of 3.2% from a consensus of 3.0% and a prior of 3.7%, revised up to 3.9%. Industrial Production s.a. (MoM) (Nov) was 1.0% v an expected 0.8%, from 0.2% previously, which was revised up to 0.4%. EURUSD moved marginally lower on the data to 1.19387.
Eurozone ECB Monetary Policy Meeting Accounts were published at 12:30 GMT on Thursday. The ECB said they could consider a 'gradual shift' in guidance from early 2018. Inflation was an ongoing concern to the ECB and 'the relative importance of guidance on rates will increase as inflation rises.' They said that a transition to a broader forward guidance, comprising various dimensions of policy stance was warranted and they would revisit the whole issue in early 2018. On the policy side, they had ' increased confidence that inflation pressures would take hold ' and further easing of financial conditions are not regarded as warranted. They saw comfort in wage dynamics but inflation is still a concern. EURUSD soared higher from 1.19364 to reach a high of 1.20587.

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