Euro under pressure after separatist parties triumph in Catalan election

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22 December 2017


The currency markets were mostly quiet on Thursday in a typically subdued few days of trading leading into the Christmas holidays.

he Euro slipped versus the Dollar after three consecutive days of advances with the Catalan election showing that the separatist parties in the region had achieved enough combined seats to govern, albeit with no party winning a majority. This will now lead to coalition talks in the coming weeks that could shape whether or not the region pursues independence from Spain. The election itself was called last month by Spain’s Prime Minister Mariano Rajoy after the regional government was sacked off the back of the illegal independence referendum.

Meanwhile, the US Dollar trended lower on a trade-weighted basis after yesterday’s third quarter GDP data was unexpectedly revised lower. The US economy grew by 3.2% annualised in the three months to September, down on the 3.3% initial estimate. This downward revision was due primarily to slightly lower than expected contributions from consumer spending and trade. While somewhat disappointing, the revision was modest and the expansion was still the highest in the country since early-2015. Growth in excess of 3% annualised is more than fast enough, in our view, to convince Federal Reserve members the need for higher interest rates in the US in 2018.

Closer to home, Sterling was relatively range bound due to a lack of economic data or significant news on the Brexit front. Yesterday’s public finance data was strong, although not enough so to shift the Pound. We now look to this morning’s revised GDP data.

The best performing major currency yesterday was the Canadian Dollar, which shot higher against its major peers following the release of an impressive set of economic data. The latest inflation numbers in Canada showed that consumer price growth jumped by 0.3% in November, taking the year-on-year measure back to 2.1%, its highest level since January. Encouragingly, retail sales also powered ahead in November. Sales jumped by 1.5%, the most in nine months, crushing expectations of a modest 0.3% increase. After a number of weeks of striking a cautious tone, last week’s relatively hawkish comments from Bank of Canada Governor Poloz, accompanied by the recent uptick in data, suggest that another interest rate hike in Canada may be back on the table in the first half of 2018.