Market News & Insights
7 September 2016

Dollar Gives Back All Its Recent Gains

As tends to be the case with currency markets, central banks are the dominant themes at the moment. Looking in sequential order, first up is the topic we have discussed most this week as to whether a Fed rate hike is likely later this month. The sentiment has now shifted back in the opposite direction after a raft of weak U.S. economic data ever since Fed Chair Yellen’s speech at Jackson Hole, has quelled speculation the Federal Reserve will raise rates. Obviously last Friday’s muted Non-Farm Payroll hasn’t helped but further doubt has been cast after the release of another key US economic indicator on Tuesday. The report showed the Institute for Supply Management’s gauge of U.S. services activity slumped to a six-year low. The figure adds to a picture of uneven growth in the world’s biggest economy after indicators in the past week showed a contraction in manufacturing and a slowdown in hiring. The probability of the Fed hiking rates this month has dropped back again by eight percentage points to 24%. From a currency perspective, the dollar fell against its 10 major peers, hitting two week lows. The short term outlook for the US Dollar now isn’t good with room for the market to further price out the risk of a September hike. In terms of the main currency pairs, EURUSD is now back trading at 1.1245 with 1.1280 and 1.1340/65 likely to act as resistant points for now. Significantly too, during the dollar’s run in the past week or so, EURUSD failed to break the 200 Day Moving Average of 1.1130. Cable too moved higher, hitting 1.3444 yesterday getting interesting close to a key level of 1.3505, a level GBPUSD has failed to close above ever since the Brexit referendum result.

Back in the UK sees the clash of law makers and central bankers, with BOE Governor Mark Carney giving testimony to the treasury committee at 2.15pm. If nothing else, this should be compelling to watch the grilling the Governor is likely to get especially from pro Brexit politicians who are feeling a little more bullish in recent days after a series of stronger than expected UK data showing the economy hasn’t fallen off a cliff (yet!) and that a recession could be missed. This is going to form the crux of the debate as to whether the BOE’s MPC acted too rashly with last month’s series of including a rate cut and an extension of QE. In terms of how market informative this will be, market participants will look through the political gesturing and focus on any outlook or economic assessment the BOE may provide to see if their thinking has changed in recent weeks.  In its last set of official projections published alongside the August decision, the BOE predicted slower growth, faster inflation and rising unemployment. Minutes from the BOE’s last meeting showed most policy makers expected to “support a further cut in the bank rate” later this year should the data evolve as they predict. Markets will watch to see if that still stands. The probability of a reduction by the BOE’s at December meeting is now down to 26% from almost 40% after the last decision.

Next up will be tomorrow’s ECB meeting with markets again looking to see if there any changes to Draghi & Co’s economic projections. This updated outlook will play a key part in the Governing Council’s meeting. The uncertainty created by Brexit suggests that they’ll likely to be little changed from three months ago. Draghi has been very quiet this summer which to us suggest little or no change is the most likely outcome. We will discuss the meeting in more detail in tomorrow’s morning piece.