Divergence, Theme, Questioned, Moneraty Policies, ECB, Federal Reserve, fx trader, forex

Meanwhile, the Republican health care plan as an alternative to the current Affordable Health Care Act (a.k.a. Obamacare) may be voted on before the end of the week ahead. At stake is not only health care, but it is a keystone to the Republican’s larger tax reform efforts. Specifically, the repealing of the taxes that financed the current scheme would free up around $1 trillion over the next decade.

Of course, as most observers recognize, the Senate has other ideas and will likely pass a different bill. The differences will be hammered out in the reconciliation process, which requires a simple majority, which the Republicans possess. It is integral to the GOP strategy to use the reconciliation process to overcome the limitations posed by its slim majority in the Senate.

The reassertion of US interests, as understood by President Trump is already being felt on the world stage. The G20 statement diluted the commitment to avoid trade protectionist measures. It is a warning side of the likelihood of future conflict. The Eurogroup meeting at the start of the week will also have to take seriously the possibility that the US prevents the IMF from participating in the aid package to Greece. Recall, that the German and Dutch parliaments require IMF participation in order to secure their approval. The ability to compromise may be limited by the German election that is six months away, and for which polls warn of a resurging SPD party that may make Merkel’s fourth contest here more difficult.

The Eurozone’s PMIs have been running ahead of actual data. We expect the flash PMI, the main economic report for the week, to soften slightly.  However, more attention may be paid to the price components and the official comments. If the macro divergence is being re-considered, the divergence in the euro area between creditor and debtor appears to becoming more pronounced again.  Even though the ECB agreed at the end of last year to extend its asset purchases through the end of the year, albeit as modestly slower pace (60 bln euros vs. 80 bln euros) starting next month, the hawks (creditors) are emphasizing a move to the exit. In particular, they have been emphasizing that the sequence may differ than the Fed’s exit.

Recall that the Fed tapered the asset purchases until ending them. Then, after several months, raised rates (December 2015). The ECB has a deposit rate of negative 40 bp.  It seems clear that the ECB is talking about its exit strategy, but the creditors appear to have pushed the issue into the public space. Both German members on the ECB talk in the week ahead and the possibility that the deposit rate is increased before the asset purchase program are complete may be underscored. This may continue to spur upward pressure on yields in the eurozone. In turn, this may see the euro-sensitive two-year interest rate differential narrow, allowing the position is squaring the foreign exchange market to allow the euro to continue the correction from the sell-off since the US election.

Similarly, the new found threat of a BOE rate hike Is unlikely to subside, and this may see sterling post additional corrective gains. The main economic report is the February CPI. Prices pressures have not peaked in the UK, and an uptick will keep investors cautious about the BOE taking back the rate cut delivered amid much uncertainty after last June’s referendum.

Officials will draw attention to the measure of consumer inflation that also includes owner-occupied housing costs, like the United States, using a rental equivalence measure.  The Office of National Statistics (ONS) says this will be it preferred measure going forward. Like other inflation measures, it is trending higher and is expected to breach the 2.0% threshold for the first time since late-2013.

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