Dollar Weak on Tax Plan Jitters, Sterling Even Worse

Dollar stays broadly weak today as Republicans’ tax plan is entering the final stage with some political jitters. Nonetheless, the Pound is overtaking Dollar is the weakest one. News that Brexit negotiation is formally entering the next phase provides little support to Sterling. Euro recovers today on news that German SPD is willing to formally start coalition talk with Angela Merkel’s CDU/CSU. But the common currency will still likely end as the third weakest as markets took ECB announce negatively. Commodity currencies are set to end the week as the strongest ones.

Actual tax bill texts expected soon, but Senate vote uncertain

Regarding the tax plan, members of the conference committee, the panel of House and Senate lawmakers would likely sign the report early today. Details about what were agreed would be included in the report, as well as the language of the final legislation. The report, and possibly the actual tax bill texts too, will probably released before the weekend.

The chambers are expected to vote on the bill next week but it’s unsure whether House of Senate will go first. Situation in the Senate has worsened this week with Marco Rubio of Florida threatened to vote against the bill. Bob Corker of Tennessee could also maintain his "no" vote. It’s well known that Republicans only have a slim 52 majority there. Vice President Mike Pence said he’s postponed a trip to the Middle East to preside over the Senate vote. His vote may be needed in case of of 50-50 tie.

Released from US, Empire state manufacturing index dropped to 18 in December, down from 19. Canada manufacturing sales dropped -0.4% mom in October.

EU formally agreed to start 2nd phase of Brexit talks

As European Council President Donald Tusk tweeted, "EU leaders agree to move on to the second phase of Brexit talks". It came in as widely expected as it’s already declared last week that sufficient progress were made on the negotiations. UK Prime Minister Theresa May told EU leaders during the summit in Brussels that the UK "makes no secret of wanting to move on to the next phase and to approaching it with ambition and creativity". And, she emphasized that "a particular priority should be agreement on the implementation period so that we can bring greater certainty to businesses in the UK and across the 27."

Bundesbank: German economy will grow robustly

Bundesbank raised growth projection for 2018 to 2.5%, up from 1.7%. For 2019, growth is projected to be 1.7%, up from prior 1.6%. For 2020, growth is expected to slow further to 1.5%. Headline inflation projection for 2018 was revised up to 1.6% (from 1.4%), but revised down to 1.7% (from 1.8%) in 2019. Nonetheless, the path is still up from 1.6% to 1.7% and then 1.9% in 2020.

Bundesbank President Jens Weidmann said in a statement that "we will see a persistently high underlying pace of economic growth not only in the final quarter of 2017 and the first quarter of 2018, but also over the remainder of 2018, during which time the German economy will grow robustly."

However, "the further growth opportunities are being constrained, above all, by strong capacity utilization and, in particular, labor shortages."

Japan large manufacturing confidence hit 11 year high

Japan Tankan survey showed improvements in large manufacturing business confidence in Q4. The results support BoJ’s upbeat assessment on the economy. And they will likely add to the central bank’s confidence that inflation will eventually return to 2% target as economy improves. However, considering the slowdown in capex growth and slower improvement in other readings, there is still a long way to go for the BoJ.

Large manufacturing index rose 3 pts to 25 in Q4, beating expectation of 24. That’s also the highest level in 11 years since Q4 of 2006. Large manufacturing outlook was unchanged at 19, below expectation of 22. Large non0manufacturing index was unchanged at 23, below expectation of 24. Large non-manufacturing outlook rose to 20, but missed expectation of 21. All industry capex spending rose 7.4%, slowed from 7.7% and missed expectation of 7.5%.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3387; (P) 1.3425; (R1) 1.3467; More….

GBP/USD drops sharply today as correction from 1.3549 is extending. Intraday bias remains neutral for the moment. Overall, we’d maintain that as long as 1.3220 support holds, further rise is in favor. On the upside, break of 1.3549 will target 1.3651 high next. However, firm break of 1.3220 will turn near term outlook bearish for 1.3038 key support level.

In the bigger picture, while the medium term rebound from 1.1946 low was strong, it’s limited below 1.3835 key support turned resistance. As long as 1.3835 holds, we’d view such rebound as a correction. That is, we’d expect another leg in the long term down trend through 1.1946 low. However, sustained break of 1.3835 should at least send GBP/USD to 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466.

Economic Indicators Update