European FX Outlook: World is a better place one week before Christmas

What you need to know before markets open:

• The world looks like a better place one week before Christmas, at least given the economic growth outlook that the world major central banks pursued in their latest round of meetings this year.
• While the US Federal Reserve was the sole major central bank to have raised the policy rates in December, it also increased its GDP forecast for 2018 while sticking to a conservative outlook for inflation that has cost the US Dollar its positions.
• The Bank of England kept policy tools untouched in December struggling with inflation way above the target. Sterling’s depreciation is almost fully fed in, so inflation is expected to decelerate from now on. The Bank of England broadly stuck to economic projections from November Inflation Report.
• The ECB also left the policy rates and other tools unchanged in December, but revised GDP growth upwards substantially. In terms of inflation, the ECB remained indifferent with President Draghi saying inflation is less affected by central bank action.
• The Bank of England bulletin and chief economist’s speech from the same institution is set to headline the agenda for European morning.
• The progress on the US tax reform slows as senators argue about details.

Friday’s market moving events

• The Eurozone trade balance is expected to see a surplus of 24 billion EUR in October.
• The bank of England bulletin will be published summarizing economic and financial markets development in the UK.
• The Bank of England chief economist Andy Haldane is set to speak at the International Rome Conference on Money, Banking, and Finance, in Palermo at 13:15 GMT.
• The Empire State manufacturing index is seen decelerating to 18.6 in December.
• The US industrial production is expected to rise 0.3% m/m in November after 0.9% in October.

Major forex market movers

• The US Dollar corrected most of the losses against EUR while losing slightly against GBP and JPY on Thursday.
• With no major macro headlines scheduled for Friday, consolidation phase is about to drive the forex markets.

Thursday’s macro summary

• Australian employment rose 61.6K and the unemployment rate remained at 5.4% in November.
• China’s retails sales increased 10.2% y/y in November.
• China’s industrial production rose 6.1% y/y in November.
• China’s central bank, the People’s Bank of China, raised the interest rates for the first time since mid-March in a surprising move after Fed. Both 7-day and 28-day repo rates were lifted by 5 basis points, while PBoC left 14-day repo rate unchanged.
• French CPI rose 0.1% m/m and decelerated to 1.2% y/y in November.
• Spanish CPI increased 0.5% m/m and 1.7% y/y in November.
• Flash manufacturing PMI for France rose unexpectedly strongly to 59.3 in December, marking the highest level in 207 months while services PMI decelerated to 59.4 in the same month.
• Flash manufacturing PMI for Germany rose to an all-time high of 63.3 while services accelerated to a 24-month high of 55.8 in December. The composite PMI rose to 58.7, the highest level in 80-months in December.
• The Eurozone Flash manufacturing PMI is expected to 59.8 while services are seen edging down to 56.0 in December. The composite PMI is expected to decelerate to 57.2 from 57.5 in the previous month.
• The UK retail sales are expected to rise 0.4% m/m in October while rising 0.3% y/y.
• The Bank of England left the Bank rate unchanged in line with expectations with the accompanying statement broadly in line with economic assessment in November Inflation.
• The ECB kept interest rates unchanged in December but increased substantially the growth forecast for 2018 by 0.5% to 2.3%.
• The US retail sales rose 0.8% m/m while rising 6.3% y/y in November. The core retail sales rose 1.0% m/m, both above expectations in November.
• The US initial jobless claims rose 228K in the week ending December 8.
• Canada’s new house price index rose 0.1% m/m in October with capital Ottawa rising 1.0% m/m.
• The US manufacturing PMI accelerated to an 11-month high of 55.0 in December while services PMI decelerated to a 15-month low of 52.4 in the same month.
• The Bank of Canada Governor Stephen Poloz that BoC wants the economy to run hotter for a while to use up excess capacity in labor market and that he sees a high level of household debt as a by-product of monetary policy, so he wants to make sure we don't underestimate the risks.