Dollar slump erases Brexit effect
Dollar weakness continued to drive the market movements yesterday, although Sterling also benefited from strength in oil prices and optimism surrounding global growth. The Pound peaked around 1.3820 against the Dollar with stop-loss selling triggered once past 1.3800 with Sterling resisting selling pressure against the Euro.
Silvana Tenreyro, an external Bank of England MPC member, stated that as of December there was no immediate need to raise UK interest rates but that a further two rate hikes were realistic over the next three years. She did, however, point to the possibility of a faster recovery in productivity growth which, if achieved, would point to a faster pace of interest rate increases. The immediate market impact was limited with Sterling trading close to 1.3800 against the Dollar and 1.1235 against the Euro.
The latest UK inflation data, with consensus forecasts for a small decline in the headline rate to 3.0% from 3.1%, will likely drive momentum in the short term.
Dollar trading resumes trading after the Bank Holiday. After being closed all of yesterday, the Dollar was under selling pressure. Cable extended its rise to peak at 1.3813 shortly before dropping below the 1.3800 level again whilst against the Euro, highs of 1.2289 were seen. These are the weakest Dollar levels we’ve seen since the June 2016 referendum.
Reasons for the recent Dollar decline have not been directed at the US’s economic data as Friday’s recent core CPI and retail sales figures would have normally provided the Dollar with some backbone. Instead, reasons outside of the world’s largest economy are to blame. That said, there is increasing confidence for a hawkish rate hike cycle. Some analysts report markets have now priced in an 85% chance of a hike come March and a three-hike cycle before 2019 as growth remains strong.
The Euro jumped to a three-year high versus the Dollar as optimism around growth buoyed expectations of tighter monetary policy from the European Central Bank (ECB), and Germany edged closer to forming a government. EURUSD traded as high as 1.2295 and looks well-placed to add to its gains in the coming weeks.
Yesterday, the Eurozone trade balance reached a surplus of €26.3 billion in November with exports rising 7.7% y/y and imports up 7.3% y/y.
Speculation that the ECB will end its asset purchase programme in September, as opposed to extending it through year-end, strengthened the Euro.
The ECB’s Ardo Hansson told Boersen-Zeitung that for the time being, a stronger Euro poses no threat to the inflation outlook. According to Hansson, the ECB can end purchases in one step with no problem.
Today sees the Eurozone trade balance which is expected to reach a surplus of €28.2 billion in November, as well as the German Harmonised index of consumer prices which is expected to remain unchanged at 1.6% y/y in December. The German national standard CPI is set to rise 1.7% y/y.
Data To Watch:
07:00 EUR Wholesale Price Index (MoM) (YoY) (Dec)
07:00 EUR Harmonised Index of Consumer Prices (YoY) (Dec)
09:30 GBP PPI Core Output (MoM) n.s.a (Dec)
09:30 GBP Producer Price Index – Output (YoY) (MoM) n.s.a (Dec)
09:30 GBP PPI Core Output (YoY) n.s.a (Dec)
09:30 GBP Producer Price Index – Input (MoM) (YoY) n.s.a (Dec)
09:30 GBP Consumer Price Index (YoY) (MoM) (Dec)
09:30 GBP Core Consumer Price Index (YoY) (Dec)