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The dollar had a mixed performance for the session even with upbeat retail sales, and it was the euro that found clear direction during the ECB presser.

Although the central bank upgraded growth forecasts, Draghi refrained from dropping any tightening hints. On the other hand, the Canadian dollar got a boost when BOC head Poloz talked about the need for less stimulus.

  • U.S. headline retail sales up 0.8% vs. 0.3% in Nov
  • U.S. core retail sales up 1.0% vs. 0.6% in Nov
  • U.S. import prices increased by 0.7% as expected
  • U.S. initial jobless claims down from 236K to 225K vs. 237K forecast
  • U.S. flash manufacturing PMI rose from 53.9 to 55.0 vs. 54.0 consensus
  • U.S. flash services PMI fell from 54.5 to 52.4 vs. 54.8 forecast
  • U.S. business inventories dipped by 0.1% as expected

Major Events/Reports

ECB presser

Following the central bank’s announcement of keeping interest rates on hold and its easing program unchanged as expected, ECB Overlord Draghi held a press conference to share more insights on their decision.

In his opening statement, Draghi mentioned that favorable financial conditions are needed to lift inflation up to their 2% target. He noted that domestic price pressures remain muted and that an ample amount of stimulus is still necessary.

On a more hopeful note, Draghi acknowledged that the momentum in growth suggests that inflation could pick up at some point. This has bolstered policymakers’ confidence that inflation will eventually reach the target but that the headline figure could still slow in the coming months.

When it came to economic forecasts, Draghi announced that the staff projects annual real GDP to reach 2.4% in 2017, 2.3% in 2018, 1.9% in 2019 and 1.7% in 2020, representing significant upgrades from their earlier estimates in September.

As for inflation, he acknowledged the recent HICP uptick but warned that “measures of underlying inflation have moderated somewhat recently, in part owing to special factors.” 

Nonetheless, Draghi announced upgrades in their inflation forecasts to 1.5% in 2017, 1.4% in 2018, 1.5% in 2019 and 1.7% in 2020 to reflect higher oil and food prices. However, he did drop a line on downside risks from foreign exchange movements.

Responding to a question on rate changes, Draghi clarified that their forward guidance on interest rates is unchanged. He added that the committee has not discussed cutting the link between QE and inflation and that corporate bond purchases were not discussed.

Upbeat U.S. economic data

It was all green for Uncle Sam as top-tier and medium-tier reports printed stronger than expected reports… well, at least most of it did.

The only piece of disappointment was the flash services PMI, which surprisingly sank from 54.5 to 52.4 instead of improving to the 54.9 consensus. In contrast, the flash manufacturing PMI jumped from 53.9 to 55.0 versus the projected uptick to 54.0.

Headline retail sales rose 0.8%, outpacing the consensus of a 0.3% gain, while the core version was up 1.0% versus the 0.6% forecast in November. To top it off, the previous readings enjoyed upgrades, from 0.2% to 0.5% for the headline reading and from 0.1% to 0.4% for core retail sales. Looks like Americans were in a jolly shopping mood lately!

Underlying data revealed that the gains were spurred by holiday sales as households bought a wide variety of goods while trimming purchases of big-ticket items like automobiles. On a year-over-year basis, consumer spending is up 5.8% in November.

Moving on, import prices posted a 0.7% gain as expected, faster than the previous 0.1% uptick to reflect potentially stronger inflationary pressures. Initial jobless claims fell from 236K the other week to 225K instead of rising to 237K.

Speech by BOC Governor Poloz

In a speech at the Canadian Club of Toronto, BOC head honcho Poloz talked about the three things keeping him awake at night. And no, those weren’t spiders, the Boogeyman, or a “Stranger Things” marathon!

Poloz mentioned uncertainties coming from cyber threats, elevated household debt, and youth unemployment as the three long-term issues he’s currently trying to wrap his head around. However, Loonie bulls took note of his remarks on how the economy might need less stimulus over time.

Still, the BOC head reiterated that they will stay cautious on future hikes, but added that this doesn’t necessarily imply that policymakers will keep sitting on their hands. He added that he sees upside inflation risks as firms operate near full capacity and that wage growth could pick up. He noted:

“The economy has made tremendous progress over the past year, and it is close to reaching its full potential. We are very encouraged by this, and we are growing increasingly confident that the economy will need less monetary stimulus over time.”

As with Fed head honcho Yellen, Poloz also took a swipe at bitcoin, citing that it is not a reliable store of value and that trading it is closer to gambling than investing.

Major Market Mover(s):

EUR

The shared currency was down in the dumps as Draghi sounded optimistic about inflation but stopped short of giving rate hike hints.

EUR/USD fell from a high of 1.1863 to a low of 1.1764, EUR/JPY sank to a low of 132.16, EUR/GBP dipped to the .8775 support area, and EUR/AUD slumped to 1.5346.

CAD

The Loonie popped higher during Poloz’s somewhat hawkish testimony but was unable to hold on firmly to its winnings.

USD/CAD dipped to a low of 1.2713 then bounced back above the 1.2800 level, CAD/JPY popped up to a high of 88.20 then retreated quickly, EUR/CAD fell to the 1.5000 major psychological level, and GBP/CAD is down to the 1.7175 area again.

Watch Out For:

  • 11:50 pm GMT: Japanese Tankan manufacturing index (rise from 22 to 24 eyed)
  • 11:50 pm GMT: Japanese Tankan non-manu index (rise from 23 to 24 expected)