• Speculators had driven the dollar higher on Wednesday in expectation that Trump’s first news conference since his victory on November 8 would give more detail on new fiscal spending and tax measures to repatriate U.S. corporate capital held overseas.
• Instead, the event was dominated by debate over Russian hacking and unsubstantiated claims that he had in the past been caught in a compromising position in Moscow. U.S. Treasury yields fell to their lowest since November in early deals in Europe on Friday.
• We think that the USD rally driven by expectations for Trump’s fiscal easing was fundamentally unjustified. Our problem with that line of reasoning is as follows – the US economy is currently operating at near full capacity, which implies that substantial fiscal stimulus (lacking the ingredients to improve productivity) is likely to compress US real rates further via higher inflation. In fact, over past years, material fiscal expansions when the economy’s output gap was similar to what it is now have been broadly associated with lower real rates and meaningful USD depreciation.
• We expect the EUR/USD to continue its recovery and recent Eurozone macroeconomic data support our view. Eurostat said on Thursday industrial production in the 19-country single currency bloc rose in November by 1.5% mom and 3.2% yoy. Both figures were much higher than market expectations. GDP grew a modest 0.3% in second and third quarter of last year, after a 0.5% rise in the first quarter. We expect an acceleration of GDP growth in the last quarter of the year.
• Our long EUR/USD was stopped yesterday at 1.0470, but this does not change our bullish view, at least in the short term. We have placed another bid at 1.0620 with the target of 1.0770.

GBP/USD recovered after Trumpflation trade failed

• The USD had rallied since Trump’s victory in the November 8 election, soaring to 14-year highs on the view that his fiscal stimulus programme would boost growth and inflation, leading to a faster pace of U.S. interest rate rises – the so-called “Trumpflation trade”.
• But with Trump providing scant clarity on economic policy, the dollar fell to four-week lows, giving a lift to sterling, which was trading more than 2 cents higher than Wednesday’s low.
• Traders are now focused on a decision – expected in the coming days – from Britain’s Supreme Court on whether to approve a High Court ruling last year that said May’s government needed parliamentary approval before triggering “Article 50”, which will formally kick off Brexit negotiations.
• Investors reckon if lawmakers from across the political spectrum – a majority of whom supported staying in the EU in June’s referendum – are involved in triggering Article 50, they will push for a “softer” Brexit, which would be sterling-positive.
• A further boost to sterling could come if Britain is forced to delay its exit talks because of a potential suspension of Northern Ireland’s regional assembly. The resignation of Northern Ireland’s Deputy First Minister Martin McGuinness on Monday effectively collapsed the devolved government.
• Bank of England Governor Mark Carney said on Wednesday that the immediate risks from Brexit had fallen, and that the central bank may now raise its forecasts for the UK economy. Hawkish MPC rhetoric would be another argument supporting the GBP.
• We stay sideways on the GBP/USD pair because of high political uncertainty.

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