SGH reports are highly valued for keeping clients and policymakers informed and well-ahead of consensus and the news cycle on the macro policy events driving global markets.

December 10, 2018
SGH Insight
President Xi Jinping presided over a crucial meeting last Friday, December 7, in Zhongnanhai to discuss China’s global relations, the Buenos Aires trade summit with President Donald Trump, and the detention of the CFO of Huawei Technologies in Vancouver. At the meeting in Zhongnanhai, Xi nevertheless reinforced that China is still willing to reach a trade agreement with the US, and willing to import more American goods. Despite the negative impact of the Huawei incident, China will not suspend trade talks with the United States.
Market Validation
(Bloomberg 12/11/18)
U.S. equity futures and European stocks rallied while Asian shares slipped as investors weighed the prospects for success in American-Chinese trade talks. The pound rebounded.

Futures on the Dow Jones, S&P 500 and Nasdaq indexes all jumped, shrugging off losses in the Asian benchmark after China was said to move toward cutting tariffs on American-manufactured cars. Miners and carmakers advanced, helping the Stoxx Europe 600 Index extend gains. The pound rallied, trimming some of its tumble from a day earlier. The dollar weakened while Treasuries and European sovereign bonds fell.

The news on car tariffs followed reports that Chinese Vice Premier Liu He discussed a timetable for trade talks with Treasury Secretary Steven Mnuchin, which also helped to bolster sentiment.

By holding the phone call, both sides are suggesting a willingness to keep the negotiations from getting derailed by Chinese anger at the arrest of a senior executive at China’s Huawei Technologies Co.

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December 06, 2018
SGH Insight
We think an output cut agreement will still fall into place by the end of the day on Friday. The final headline number for the size of the targeted cuts is likely to reach at least one million bpd, with a decent probability of a 1.2 million bpd cut that is being pressed by Saudi Arabia (SGH 9/26/18, “Oil: The Saudi Two-Stage Floor Strategy”). Assuming they get the blessing from Putin, the Saudis will press the case the cuts are to stabilize crude prices, not to spark a rally, in the hopes that pitch will be enough to stem a renewed tweet storm from President Trump.
Market Validation
(Bloomberg 12/7/18)
OPEC Meeting Ends W/ Deal on 1.2Million B/D OPEC+ Cut: Delegates

European Stocks Extend Gains on OPEC Deal, After U.S. Payrolls
By Ksenia Galouchko
Stoxx Europe 600 Index extends gains to 1.5% after OPEC meeting ends with agreement on 1.2m bbls/day OPEC+ cut.
Biggest gainers include Nestle +2.3%, Shell +4%, BP +3.8%, Total +2.7% Brent oil is up 5%
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November 30, 2018
SGH Insight
Senior Chinese officials are very pleased with the initial contacts with their US counterparts and remain confident the Buenos Aires talks will lead to a temporary truce on trade (see also this morning’s SGH Report 11/30/18, “China: Xi’s G-20 Proposals to Trump”).

Treasury Secretary Steve Mnuchin and President Trump’s son-in-law Jared Kushner have met, from what we understand, with China’s two lead negotiators, Vice Premier Liu He and China’s top diplomat, Yang Jiechi. Beijing understands these two are leading the US delegation as Trump’s most trusted confidantes and aides, supported in turn by US Trade Representative Robert Lighthizer.

While much remains still to be done, Beijing reads the initial signals from the US side so far as very positive towards reaching a mutual understanding and trade truce at the summit.
Market Validation
(Bloomberg 12/3/18)
Stocks Jump With Bond Yields on Trade
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November 26, 2018
SGH Insight
While a dovish-sounding turn of phrase may find its way into the Chairman’s speech, we suspect the thrust of his remarks will be less about near signals, dovish or otherwise, than it will be to prepare market expectations for the uncertainties to the rate path beyond the still likely December rate hike. Our sense is of a lean within the FOMC favoring a pause, if possible, but as rates reach or near an estimated neutral level next year, the data-driven rate moves could also quicken or stay at the same gradual pace in what is still an upward tilt to the FOMC rate consensus.
Market Validation
(WAPO 11/28/18)
Federal Reserve Board Chair Jerome H. Powell on Wednesday suggested the central bank could slow the pace of its interest rate increases, saying rates are now just slightly below what he considers a “neutral” level.

His comments marked a sharp change from his position last month, when he said the Fed still had a “long way” to go before it reached that equilibrium.
U.S. stock markets soared on Powell’s comments, as he appeared to signal that the Fed would not move forward aggressively to raise rates much further than it already has. The Dow Jones industrial average pushed up 500 points, an increase of nearly 2 percent, a surge that erased its November losses and put it back in positive territory for 2018.

Still, by saying rates were slightly lower than the level he perceives as “neutral,” Powell’s statement appears to be suggesting at least one more interest rate increase is coming in the near future.

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August 07, 2018
SGH Insight
*** From what we understand, Beijing may be ready to provide assurances, one more time, that it will reduce the total trade surplus with the US by an agreed amount. But any agreement from Beijing would not include concessions on China’s strategic drive towards dominance in technologies including robotics, artificial intelligence, and 5G telecommunications networks. ***

*** We believe this remains nothing more for the moment than a trial balloon to feel the Trump Administration out, and from what we understand there have been no communications of substance yet between China’s powerful Vice Premier Liu He and his US counterparts since talks broke down exactly one month ago, today. With November elections in mind, Beijing feels the time may be ripe, perhaps by the middle or end of August, to give it another try. ***
Market Validation
(Bloomberg 8/16/18)
China will dispatch Vice Commerce Minister Wang Shouwen to the U.S. for low-level trade talks in late August, the first official exchanges since earlier negotiations broke down two months ago.
The Chinese delegation led by Wang will meet with an American group led by David Malpass, under secretary for international affairs at the Department of the Treasury, at the invitation of the U.S., China’s Ministry of Commerce said in a statement on its website on Thursday.
The news buoyed risk sentiment in Asian trading, with futures on the S&P 500 Index rallying as much as 0.4 percent.
The offshore yuan gained against the dollar for the first time in seven days.
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July 12, 2018
SGH Insight
Indeed, and especially if the economy and markets can continue to demonstrate resilience in the face of the continued White House challenges to China, our understanding is that there will likely be “another 200 to follow this 200,” until essentially all $500 billion of US imports from China – a number often cited by Trump – is put under review for the threat of potential tariffs.
Market Validation
(Bloomberg 7/20/18)
U.S. equity futures turned lower with European stocks as President Donald Trump said he was “ready to go” with import tariffs on $500 billion of Chinese goods. Earlier in Asia stocks had reversed losses amid signs the Chinese central bank stepped in to stem weakness in the yuan.
S&P stock-index futures declined along with the Stoxx Europe 600 gauge after Trump told CNBC he was ready to ratchet up the tariffs “to do the right thing for our country”.

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June 07, 2018
SGH Insight
We do not believe Praet, who as Chief Economist of the ECB sets the agenda for policy decisions at every meeting, pre-emptively flagged the discussion on whether to end QE for this meeting without the intention to signal that the decision is likely to be made and the end of the program announced this month as well.
Importantly, while the ECB is, we believe, using the window created by some stabilization in the Italian markets to pull forward the announcement on QE a bit, that does not translate into an effort to bring expectations for liftoff on interest rates closer, and into the first half, of 2019. We expect President Mario Draghi to make that point clear in next week’s press conference, as well as to stress the extreme accommodation that will still be provided into 2019 by reinvestments and by the massive ECB balance sheet. If the forecasts hold, we continue to expect the first ECB rate hike to come in early Q3 of 2019.
Market Validation
(Bloomberg 6/14/18)
Euro bulls are losing confidence.
The shared currency declined against all of its Group-of-10 peers Thursday after the European Central Bank said it would keep interest rates at current levels until at least the summer of 2019.
The euro was down 1.4 percent at $1.1632, set for its biggest one-day slide since Oct. 2017.
Bunds Rally as ECB Signals No Hike Until at Least Summer 2019
Bunds hit new session low at 159.45 on the taper announcement by ECB, but rapidly reverse decline after the ECB pledges to keep interest rates at record lows until at least the summer of 2019.
German curve steepens aggressively led by 5/30s; +2bps to 134bps
German 10y yield -3bps to 0.46%: Sept Bund futures +25 ticks to 160.32; Spain 10y -2bps to 1.39%; Italy 10y +1bp to 2.82%

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May 25, 2018
SGH Insight
We expect the June 22 OPEC/non-OPEC meeting to formally keep the 2016 oil output cuts in place, as Riyadh sees this hard-won Vienna framework as key to putting in a market floor by making future action on supply restraint more credible and quicker to decide and implement. There will be “flexibility” in the quotas by driving overall compliance down from the current 150% level closer to 100% with a lagged new output largely coming from Saudi Arabia and Russia, with additional barrels from Kuwait and the UAE, through the second half of this year.
Market Validation
(Business Insider 5/30/18)

Oil rallied more than 2% Wednesday after a report said that OPEC could extend supply cuts through the end of the year.

West Texas Intermediate rose 2.2% to $68.35 a barrel at 12:15 p.m. ET. Brent, the international benchmark, was up 2.72% to $77.45 a barrel. Prices had been sliding last week after OPEC signaled it could raise output amid supply disruptions in Venezuela.

But output increases might not happen until at least next year. A Gulf source familiar with the thinking of the Saudis, told Reuters that members of the cartel are "satisfied" with the current agreement deadline of December.
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May 22, 2018
SGH Insight
We would first caution that this base case consensus is a relatively fragile one. There remains an undertow of dovish doubt still pulling the Committee consensus towards caution on the pace of rate hikes, at least until data breaks more clearly. There are, for instance, fresh doubts over the scale of the fiscal stimulus, that it may “fizzle out” after 2019, and whether the Fed may need to “look past” the assumed price pressures it will bring. And while inflation is widely expected to modestly overshoot its twice-repeated symmetrical 2% target, there remains a concern it could still peak and then ebb again rather than persist.

Market Validation
(FT 5/23/18)
Treasury yields slip after ‘dovish’ Fed minutes

Investors bid up short-term US government debt after a detailed account of the last Federal Reserve meeting was judged as leaning towards the dovish end of the spectrum.

In recent trade, the yield on the policy-sensitive two-year Treasury note fell 5.6 basis points (0.056 percentage points) to 2.5363 per cent. The yield, which moves in the opposite direction of price, traded at the lows of the day roughly 30 minutes after the release of the minutes from the central bank’s May meeting.

Further down the maturity curve, the US 10-year yield was down 5.9 bps at 3.0063 per cent, but it had not knocked out the lows set earlier in the day.

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April 18, 2018
SGH Insight
Chinese officials believe the US Trade Representative is, indeed, likely to launch a new round of Section 301 investigations against China under the direction of the White House, targeting mainly the high-tech, especially Artificial Intelligence and cloud computing sectors. On the heels of measures against Chinese companies including Huawei and now ZTE, they are bracing for more salvos against China's high-tech companies with business in America, including, potentially, corporate giants such as Alibaba and Baidu

The US sales ban, officials note, will not only cause ZTE to miss shipments and lose orders on handsets and transmission equipment. It will also seriously harm ZTE's 5G and Artificial Intelligence development process. That ban comes just two weeks after ZTE succeeded in making a first phone call enabled by 5G technologies.

According to the State Council, Beijing's aim is to make China among the first countries to issue 5G licenses in the second half of 2019. And beyond that, the goal has been to commercialize 5G by 2020, and to become the world's largest 5G market by 2025 - all adding to China's extreme sensitivity to these actions.
Market Validation
(Bloomberg 4/20/18)
Apple Downgraded at OTR as Chinese Channels Seek Local Options By Kamaron Leach

Apple Inc. fell 3.5%, the most in two months, as OTR Global cut the iPhone developer to mixed from positive, citing a deteriorating China outlook as Asian vendors edge in on market share.
Notes that while iPhone order outlook is normal for more than one-half of AAPL sources, very large Chinese channels are reducing their 2Q18 order share and opting for local vendors AAPL was able to hold most of its share in a weak global market during 1Q18, but data indicates competition is intensifying
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April 09, 2018
SGH Insight
In his keynote speech, Xi is likely to announce the harmonization, this year, of domestic and international standards for entry of banks into China’s markets, and also the easing of restrictions this year on the share of foreign owned equity in companies in sectors including banking, securities, fund management, futures and financial asset management.

From what we understand, Xi has also considered an announcement that China will open up its general manufacturing sector, including granting easier access to sectors such as new-energy vehicles, telecommunications, medical services, and education.

Market Validation
CNBC 4/10/18
Stocks rallied on Tuesday as Wall Street breathed a sigh of relief after China's president said he would work to "open" the country's economy, easing trade war fears.

The Dow Jones industrial average gained 500 points, with DowDuPont as the best-performing stock ion the index. The S&P 500 gained 1.6 percent, with energy leading 10 of 11 sectors higher. The Nasdaq composite also advanced 1.6 percent.

Boeing rose 3.5 percent as concerns of a trade war were alleviated.

Chinese President Xi Jinping discussed plans Tuesday to further open up the country's economy, with measures including lowering import tariffs on autos, enforcing legal intellectual property of foreign groups and reducing duties on other consumer products.
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March 15, 2018
SGH Insight
The Governing Council will discuss the anchoring of rate expectations and the parameters around its commitment to rates at either its June 14 meeting or possibly the July 26 meeting in the run up to the September expiration of the current QE Program.At those same June and July meetings, the ECB will also discuss the parameters of its reinvestment policy for its bond holdings maturing in 2019 and beyond.The reinvestment decision has not yet been made -- but it will have a policy impact -- and it is highly likely from what we understand that maturing bonds will be reinvested in a roughly duration-neutral manner, as opposed to, for example, reinvestments into shorter maturities that would accelerate the pace of the ECB balance sheet wind-down.
Market Validation
Bloomberg 6/29/18
EGBs Flatten as Reuters Reports ECB Targeting Longer-Term Bonds
By James Hirai
Core EGB curves aggressively flatten after Reuters reports the ECB is considering buying more longer-term bonds from next year.
Germany 5/30y flattens 5bps, matching low on June 14, supported by aBuxl block trade Peripherals bull flatten as the report also mentions possible deviations from the capital key rule
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January 23, 2018
SGH Insight
From what we understand, Xi then conveyed a message to Trump that Pyongyang believes the stability of the Korean peninsula now depends on US actions. If the US were to continue to refrain from conducting joint military exercises with its allies, as it has for the duration of the Olympic games, the DPRK would not fire ICBMs or conduct nuclear tests beyond the duration of the Olympics as well.

Xi expressed China’s support for such an agreement, and held out hopes that officials from the US and the DPRK would engage in direct dialogue at the Olympics in Pyeongchang, leading to a resumption of bilateral discussions between the two countries as well a resumption of the Six-Party Talks.

Beijing, from what we understand, will furthermore seek to build on the new-found rapprochement between North and South Korea to organize a summit in the not too distant future between Kim Jong-Un and South Korea’s President, Moon Jae-in, who Xi Jinping has been actively courting.
Market Validation
(Bloomberg 3/9/18)

(FT 3/6/18)
Hopes for North Korea nuclear accord lift sentiment
Agreement for talks with the south helps extend risk rally and boost the won

North and South Korea have agreed to hold direct talks between their leaders with Pyongyang signaling it is willing to abandon its nuclear programme if its security can be guaranteed.

The won is gaining 1 per cent at Won1,065.94 per dollar, its strongest level in 11 sessions.

The dollar index is slipping by 0.4 per cent to 89.726 and the euro is up 0.5 per cent at $1.2398, with the pound 0.4 per cent higher at $1.3889 The dollar tends to face selling pressure on positive geopolitical news, since its status as the world’s reserve currency gives it lingering haven characteristics.

Similarly, investors are reducing their exposure to US government debt, drawn by the prospect of stronger returns elsewhere, sending the yield on 10-year Treasuries back to 2.9 per cent for the first time in four sessions and up by 2.2 basis points. The yield was lower by a similar margin before the Korea news broke.

According to futures trade, New York’s S&P 500 will rise 0.5 per cent at Tuesday’s open, adding to a climb of over 1 per cent on Monday.

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December 14, 2017
SGH Insight
There is a general sense among the conferees that Florida Republican senator Marco Rubio will probably get something in his demand for an increase in the child tax credit, but will back off from his threat to vote against the tax bill.

Market Validation
Bloomberg 5/15/17

Marco Rubio will be a ”yes” on tax bill, Fox says in Twitter post, citing unidentified person familiar.
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December 01, 2017
SGH Insight
Events are moving very quickly in the Senate in the last few hours that are pointing to likely passage of the Senate tax cut bill late tonight.

*** A crucial concession won by Maine Republican Senator Susan Collins just in the last hour, to put the state and local tax deduction back into the Senate tax bill, is not only key to its probable Senate passage with 51 likely (but at least the minimal 50) Republican votes later today, but it may also smooth the way to a very fast vote by the conference committee that will be tightly controlled by Senate Majority Leader Mitch McConnell and House Speaker Paul Ryan. ***

*** The Republican leadership is pressing to get the tax cut legislation to a conference vote as soon as the end of next week, ideally before the current FY2018 Continuing Resolution expires on Friday, December 8, and certainly before the special Alabama Senate election on December 12. If so, the “Tax Cut and Jobs Act of 2017” could go to President Trump for his signature into law by mid-December. ***
Market Validation
(Reuters 12/4/17)

The dollar jumped on Monday versus the currencies of most other developed and emerging nations while Treasury yields rose and Wall Street was primed for a another record-setting day after the U.S. Senate voted to approve a wide-ranging tax overhaul.

Markets reacted broadly to the Senate’s approval on Saturday for the biggest tax law change since the 1980s, taking President Donald Trump closer to his goal of slashing levies on businesses.

European stocks rose more than one percent on average , with German stocks outperforming with a 1.4 percent surge, in anticipation of a strong New York session - futures for the Dow Jones, S&P 500 and Nasdaq indexes rallied as much as 0.9 percent .
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October 13, 2017
SGH Insight
The likelihood that President Trump will select Stanford University's John Taylor as his nominee to succeed Federal Reserve Chair Janet Yellen when her term ends next February should be taken very seriously.

Taylor met with President Trump, Vice President Mike Pence, and Treasury Secretary Steven Munchin for around an hour on Wednesday afternoon. The President is understood to have been very impressed.
Market Validation
(Bloomberg 10/16/17)

The dollar extended gains late Monday after economist John Taylor was said to make a favorable impression on President Trump during an interview for the position of Fed chairman.

* The Bloomberg Dollar Spot Index rose 0.3% as people familiar said Taylor impressed Trump, while the prospects of former Fed Governor Kevin Warsh faded.

(Bloomberg) -- Treasuries extended overnight losses, led by belly of the curve, pushing 5s30s through 87bp level; morning weakness was added to over afternoon session as report suggested that Fed chair candidate John Taylor made a favorable impression on Trump.

UST yields rose as much as 4.5bp, in 5Y tenor, shortly after the close; 5s30s flattened to 86.5bp, lowest level since 2007.

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October 13, 2017
SGH Insight
Specifically, our sense is that two options under consideration would be a taper of purchases from 60 down to 40 billion Euros a month, for six months, or down to 30 billion Euros for nine months, with the latter far more likely to be adopted than the first. ECB officials can then take a lay of the land, and re-assess the Eurozone growth and inflation forecasts around the middle of next year to decide how to advance with the final leg of the program. Factoring in the reinvestments, the ECB is going to remain a significant player in the markets for some time.
Market Validation
(Bloomberg 10/26/17)

The euro fell back to a 1.1700 handle vs the dollar and was lower against a majority of its G-10 peers after the ECB unveiled plans to extend its asset purchase plan until at least September 2018 at a pace of EU30b per month. EUR fell to the lowest since Oct. 6 at 1.1707 after Draghi’s press conference ended, extending losses that began after the decision was announced.
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September 18, 2017
SGH Insight
Despite the dovish remarks by several Committee members in recent weeks, we think it is very unlikely the median projections for rate hikes this year will drop to zero. There will be some downward drift in the 2017 rate projections, but we strongly expect the median to display one more rate hike this year. The rate dot plots will, however, probably drop across 2018 and 2019, reflecting the renewed doubts across the Fed system about longer run neutral levels. But the most interesting thing about the 2020 rate dots, unveiled for the first time, may be how many are marked above the assumed neutral levels, indicating an outright tightening
Market Validation
(Bloomberg 9/20/17)

Fed fund futures indicate odds of an additional rate hike by year-end have increased as the central bank kept its 2017 median fed funds forecast unchanged at 1.375%, implying that it still has room for one more rate hike.

* Odds of December rate hike currently ~60% from about 50% before the FOMC decision; fully pricing next rate hike around mid-2018; chances of one more hike by year-end have risen from as low as 22% since Sept. 8
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August 31, 2017
SGH Insight
If the plan holds together, the combined authorization bills would likely pass with large majorities and, in theory, could be rapidly brought to floor votes as soon as the end of next week, though the following week is more likely. Democratic support would, in effect, neutralize the objections of the House Freedom Caucus, already objecting to the leaks about the plan and who are demanding spending cuts be tied to the debt ceiling suspension, while the Houston relief should silence the objections of the large Texas GOP delegation.

We would caution, however, that the expected near term rapid progress on the debt ceiling will not ease the still difficult path to the Republican-promised tax cuts, or indeed passing a Continuing Resolution to avoid a government shutdown October 1 or for that matter, again on a second go in probably December.
Market Validation
(FT 9/6/17)

US stocks pushed higher and gold dropped following reports that US President Donald Trump has reached an agreement with Democratic congressional leaders on a short-term debt limit extension.

Reuters reported on Wednesday that Democratic congressional leaders had agreed with Mr Trump to pass Harvey aid along with a debt limit increase to December 15. Such a measure would also need support from Republicans, Mr Trump’s party, who control a majority of both the House of Representatives and the Senate.

The Dow Jones Industrial Average had climbed to a gain of 0.35 per cent at 21,828, while the S&P 500 pushed higher to 0.37 per cent increase for the day, at 2,466. The Nasdaq was up 0.25 per cent at 6,391.
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May 31, 2017
SGH Insight
A dovish ECB - even as it exits from QE and negative rates - may put some initial downward pressure on the Euro. But an ECB embarked on policy normalization that faces little if any inflation pressures can remain highly supportive of the Eurozone recovery, and in the context of a market eager to embrace a positive European growth story, capital flows may if anything support and push the Euro higher. We think that could be all the more so when juxtaposed with a US outlook that has turned cautious over political gridlock, second half rate hikes, and inflation.

Market Validation
(Bloomberg 6/29/17)
Euro at 13-Month High as Bulls See Opportunity in ECB Taper Talk

The euro rallied to the highest level in more than a year while a slump in German bunds deepened on speculation that the European Central Bank is edging closer to a decision to scale back monetary stimulus.
Europe’s common currency has strengthened against all but two of its major peers in the past week as President Mario Draghi said Tuesday that reflationary forces had replaced deflationary ones in the region. Yields on German 10-year bonds are headed for the biggest weekly increase since early March.
While the sharp currency and bond swings may have vexed ECB officials, prompting comments that markets had misinterpreted Draghi’s remarks, many analysts and investors remain convinced that this week marked a turning point in the outlook for euro-area monetary policy.

The shared currency rose 0.4 percent to $1.1425 as of 9:57 a.m. in London, taking its gains in the past five days to 2.4 percent.
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