Dollar demand soaring as month end arrives

Today’s news headlines:

  • ‘US Dollar hits 16-month high as Euro, Sterling retreat’. Gains come despite ongoing concerns over the US’s trade dispute with China and the effect that could have on global growth. (Financial Times)
  • ‘Dollar defends gains thanks to China trade deal optimism’. Euro volatile after Eurozone GDP miss, strong German inflation (MarketWatch)
  • ‘How souring data is sowing doubts about the bullish case for the Euro’. Euro bulls are beginning to fret that the light at the end of the tunnel for the shared currency might be further away than hoped. (MarketWatch)
  • 'No-deal Brexit would trigger lengthy UK recession, warns S&P’. Chance of a “no-deal” Brexit had risen in recent months to such an extent that ratings agency needed to warn international investors (The Guardian)

The stand out line in currency markets now is the rampant demand for the US Dollar. Yesterday not only saw US Consumer Confidence beat expectations, but numbers like Eurozone GDP falling short of expectations, too. With US equity markets eyeing a rebound as well, whilst the Chinese economy continues to stutter, many Dollar denominated assets are proving to be a significant draw right now. The DXY Dollar Index is trading at levels not seen since June 2017 and it’s difficult to see why there will be any reversal in sentiment in the near term.

Eurozone Inflation data is scheduled for release at 10am GMT this morning and with expectations being of a higher than forecast reading here, which could prove challenging for the ECB. The GDP reading for the currency bloc yesterday indicated slower than anticipated growth. This raised doubts over the central bank’s ability to stick to the schedule of ending the asset purchase scheme this year and making that first rate hike well before the end of 2019. If we do see a reading today much above 2%, then the market will start looking for further intervention from the ECB. Maintaining the stimulus measures for longer would be one route to rescuing that nascent economic growth.

12.30pm GMT sees the release of the US quarterly employment cost index. This is tipped to creep slightly higher, up from 0.6% to 0.7%, anything above this would arguably add further weight to the Dollar’s rally. Sluggish wage growth has been a problem in the US, but signs of an upturn here would again raise talk of this factor serving to fuel inflation. The Dollar may be soaring, but there’s no reason to expect a quick reversal of fortunes here.

The month ends on a quiet note for macroeconomic data out of the UK, although overnight we saw the release of shop price data from the British Retail Consortium. This metric fell by 0.2% after two consecutive monthly rises, in turn providing the Bank of England with a little more latitude in terms of managing inflationary pressures. There’s no real expectation that we’ll see interest rates change when the Monetary Policy Committee announces its latest policy decision tomorrow. However, the quarterly inflation report typically provides some useful insight. Ahead of this however the temptation is likely to be for Sterling to remain under pressure. With no meaningful progress forthcoming on Brexit negotiations, further comments such as the ones made by S&P over the idea that no deal would push the UK into a protracted recession will do little to help the Pound, either.

GBP/USD

It’s worth noting that it’s predominantly Dollar gains in play here, but the pair is edging closer to those mid-August lows. Downbeat comments over Brexit or an uptick in US economic data later in the session would be sufficient to see cable break this level, with hopes of any rebound likely lying on tomorrow’s quarterly inflation report.

EUR/USD

Similarly the Euro found itself on the receiving end of dollar strength although is at least for now holding short of the summer lows. The market will be watching today’s Eurozone inflation print for its next signal.

GBP/EUR

The Pound continues to trend lower against the Euro although some clear signals over monetary policy from the Bank of England tomorrow may have the potential to reverse this slide. As it stands, the ECB’s policy ambitions are looking tentative, so this could end up favouring Sterling in the medium term.