Dollar bucks expectations, soaring on US trade optimism

Today's news headlines:

  • 'Dollar firms on hopes for U.S.-China trade talks, Pound steadies’. Despite dovish notes from the Federal Reserve, speculative USD long positions hit a two-year high. (Reuters)
  • ‘Rome and EU could be ready to compromise over Italy's spending plans’. Local media reports suggest both sides are willing to make concessions. (CNBC)
  • ‘EU steps up plans for no-deal Brexit as Merkel rebuffs May’. Michel Barnier warns of a sudden escalation of risk. (The Guardian)
  • ‘Tepid inflation gives Fed room to slow rate rises’. The market remains split over how the central bank will act next week. (Financial Times)

Economic data once again found itself side-lined by politics on Tuesday, with reported progress over resolving the trade spat between Washington and Beijing dominating. The DXY Dollar index pushed out close to last month’s highs, and the scale of the gains proved even more compelling given mounting speculation that the Federal Reserve needs to ease off on its policy of hiking rates. Questions continue to circulate as to whether a quarter point will be added at next week’s Federal Open Market Committee (FOMC) meeting as had been expected, but any doubts are evidently being overshadowed by optimism that a way ahead can now be found when it comes to trade. 

Sterling experienced another volatile day as Theresa May made no progress in terms of trying to strike a better deal with European leaders over Brexit. Media speculation is mounting that the necessary 48 letter threshold from Conservative MPs to force a leadership challenge is close to being met. The chair of the 1922 committee—the body which governs leadership of the Conservative Party—is scheduled to meet with the Prime Minister later this morning. Speculation suggests this could confirm May will be presented with another challenge—to cling onto her own job. Such added uncertainty would likely do nothing to help support the Pound, even at these beaten down levels.

Political developments are also unfolding within the Eurozone. Reports of Italy finding some common ground with the European Commission over its budget plans could lend support to the common currency, although this situation has now been muddied by fiscal concessions offered by President Macron of France in a bid to stop weeks of violent protest. Changes to tax policy mean that France will now miss its own deficit targets and there’s concern that Italian politicians will jump on any perceived unfairness in the way their own anti-austerity measures have been received. This angle could take some time to play out, but it underlines the challenges faced in terms of managing the priorities of the Eurozone member states.

US inflation data is the high point on today’s economic calendar, with November’s Consumer Price Index readings due for publication at 1.30pm GMT. A notable decline could underline the need for the Federal Reserve to quickly take a more dovish approach to monetary policy, although as was seen yesterday, politics rather than economics are driving the agenda right now. It would seem that developments in the Chinese trade dispute have the potential to provide far more influence on the US Dollar in the short-term.

GBP/USD

US Dollar strength served to push the Pound down to fresh 20-month lows late last night. With UK political risk still elevated, Sterling may well find that even if US economic data does start to cool, upside could be limited. 

EUR/USD

The Euro lost close to a cent against the Dollar during yesterday’s sell-off. USD optimism fuelled by trade talk progress again may keep this pair under pressure, while the threat of infighting across the Eurozone over budget controls may also limit support for the common currency.

GBP/EUR

The Pound is trading off Monday’s lows against the Euro, but only just. With no olive branches emerging from European leaders and Theresa May facing a leadership challenge of her own, even at these depressed levels, risk remains weighted on the downside.