Big Picture: Economic data released last week was mixed. There were disappointments but also some noticeable positive surprises, especially in the industrial sector in the US and eurozone, Germany’s more broad-based Ifo indicator and in buoyant Japanese foreign trade numbers. At the same time, the weekly initial jobless claims report pointed to a modest but steady improvement in the US labour market, now that the distortions from the shutdown are fading. On balance, the global economy looks to be gaining some momentum.
Interest rates: The ECB appears to be considering its options in the face of uncomfortably low inflation. A small cut in the deposit rate and QE have been discussed but would probably only be triggered if downside risks to inflation intensified. Meanwhile, the Fed is on track to taper in coming months. However, it is also considering policies to keep short rate expectations anchored. The prospect of Fed tapering and stronger economic data led to a modest rise in long rates and steeper curves. We see limited room for further rises on the 3-month horizon.
FX: Speculation about G3 central bank policy has driven the USD, euro and the JPY. A likelihood of an earlier taper has supported the USD, while expectations of easier monetary policy have hurt the euro and the JPY. In particular, speculation that the Governing Council was set to cut its deposit rate put the euro under pressure. However, the move over the week, has been modest as ECB officials have subsequently sounded more cautious on negative rates. We continue to see upside risks to our near term dollar forecasts.