Market News & Insights
16 December 2016

Dollar Remains King

The dollar remains king this morning as the market continues to trade on the backdrop of the FOMC meeting. This morning EURUSD remains just off lows not seen since 2003. The dollar index has seen big movements since Trump presidency was announcement back in November. It rose nearly 4 percent since then, and then a further 0.7 percent after the announcement of the Fed’s rate hike decision who also shifted to a more bullish trajectory on the interest rate front. This morning the index has already hit 14 year highs of 103.56. At some point you feel this will become of great concern for US companies who rely on exports. The near 14 year peaks for the dollar will also be of concern to Trump, who in the past has stating his concern regarding the high dollar. I expect markets will be following his twitter feed closely for any tweets regarding this matter.

US treasuries have also been impacted since the FOMC statement, with the 2 year US bonds yields above 1.30 percent, their highest since August 2009. The 10 year note also touched a 27 month high to 2.64 percent, up nearly 80 bps since the US election. US equity markets have also steadied and are holding near recent highs.

In the UK yesterday we saw the Bank of England vote unanimously to leave rates unchanged at 0.25 percent. The MPC however weren’t as optimistic on the UK economy as perhaps the market was anticipating as they left the door open for future rate cuts stating “monetary policy can respond in either direction”. Sterling which had held up relatively well against the dollar buckled under this pressure. Having been above 1.27 pre FOMC, the pound has now fallen to lows of below 1.24 in early morning trade. Whether the MPC truly believe this rebound in the GBPEUR cross is enough to cause an undershoot in future inflation expectations, given the rebound we’ve seen in oil remains to be seen, perhaps this is just a way for them to save face.

To the single currency where will are awaiting the final CPI numbers for November which are expected to be confirmed at 0.6%, with core prices at 0.8%. The policy divergence between the ECB and the Fed is reflected in the currency cross, with the 10-year US Treasury versus German bund yield spread now 225 basis points apart. 2017 could also be a big one for the ECB as they decide whether or not they are in fact tapering their QE programme.