Morning Report: 5 January 2017

GBP Sterling rallied against the dollar last night after the Fed hinted that a gradual path for rate hikes will be in place for the foreseeable future. However, the pound is lower across the board this morning, despite the British economic picture ending the year on a high, with December Services PMI posted the fifth consecutive monthly increase. The PMI figure was 56.2, the highest reading since August 2015, maintaining a steady stream of excellent macroeconomic releases in the UK. Elsewhere, it was revealed that British Prime Minister Theresa May has named Sir Tim Barrow as Britain's new ambassador to the EU, replacing Sir Ivan Rogers. A career diplomat with extensive experience, the appointment has been received as a 'safe' choice by the media, though former UK leader and prominent Brexiteer Nigel Farage criticised the decision to 'replace a knighted career diplomat with a knighted career diplomat'. No major data is expected to published today.

EUR The euro is strengthening against most of the G10 currencies with the exception of the Japanese yen. A number of positive data releases in the Eurozone have increased the optimism in the euro, as both manufacturing and services sectors suggest that economic growth will continue building momentum in the fourth quarter. Inflation in the Eurozone rose to 1.1% year-on-year in December, the highest since July 2011, pushed by higher food and energy prices. One of our key considerations is that crude oil prices (and therefore energy prices) bottomed exactly in January last year, which could have a significant impact in future inflation readings as higher energy prices start to be reflected in year-on-year consumer price index. This is still a hypothesis, and the European Central Bank still remains far from defeating low inflation, but higher energy related costs could start to shift consumers' inflation expectations moving forward. No euro data will be released today in the Eurozone.

USD The Federal Reserve published yesterday its latest monetary policy meeting minutes. The dollar reaction was very volatile, but it finished the day lower against all G10 currencies, and the dollar index DXY also retreated from its previous peak. The minutes indicated that a gradual path of interest rate hikes still is the Fed's preferred strategy, despite the uncertainty about future economic or fiscal policies that could be brought in by the Trump administration. Particularly, the FOMC pointed out that a much stronger dollar could be a drag to inflation. However, the Fed did emphasize the continuous strengthening of the labour market. Almost all officials agreed that the labour market is robust, and most of them expect further tightening below the full-employment rate. Ultimately, this labour market strength could be the catalyst for a 'less gradual' pace of interest rate increases.

CAD The Canadian dollar rallied yesterday significantly after crude oil prices started to increase again. The dollar weakness across yesterday's session helped oil prices to creep up, which helped the loonie. News emerged that OPEC countries daily oil production plummeted by more than 300.000 barrels/day due to an unplanned disruption in Nigeria's output. Nigeria's total pump alone decreased by 200.000 barrels/day. This could help crude oil prices in the very short term. The raw material price index and the industrial production price index are released at 13.30 GMT.

UK News

• US interest rates could rise higher than expected this year, minutes from the US Federal Reserve's December meeting show - City A.M. 'Today's FOMC monetary policy meeting minutes shows that the Federal Reserve remains cautious,' said Manuel Ortiz-Olave, market analyst at Monex Europe. 'In particular, a number of members signalled increasing uncertainty over the timing, size and composition of any sort of fiscal policy stimulus announcement from the forthcoming Trump administration. The FOMC clearly does not want to precipitate ahead of unknown outcomes from such hypothetical measures, and as such have remained practically unchanged their individual economic outlooks in comparison to November's meeting minutes.'

• UK services sector sees fastest growth since July 2015 - Reuters. Britain's economy finished 2016 strongly, growing at the fastest rate since mid-2015, even though companies faced some of the fastest-rising costs of the past five years as sterling weakened after Britain voted to leave the European Union, an industry survey showed. The Markit/CIPS Purchasing Managers' Index (PMI) for the services sector rose to a 17-month high of 56.2 in December, beating all forecasts in a Reuters poll of economists and rising a full point from November's reading. Britain's economy looked to have expanded 0.5 percent in the last three months of 2016, said Markit, which compiled the PMI. Similar surveys of manufacturers and construction companies.