Dollar index close to fresh highs for the year on rate talk

Today's news headlines:

  • ‘Gold prices steady as Fed comments boost Dollar’. Officials reaffirm the need for further interest rate hikes. (Reuters)
  • ‘Pound pundits give May a fighting chance of winning Brexit vote’. 45% of analysts surveyed expect May’s Brexit deal to pass. (Bloomberg)
  • ‘Spain, Portugal yields hit two-month lows on Italy feel-good factor’. Optimism is rising over hopes Italy will cut budget deficit target. (Reuters)

The DXY Dollar index moved higher yesterday on mounting expectations that the Federal Reserve will hike interest rates again next month. That will make it the fourth move higher in 2018, and although there’s less clarity over the picture for the New Year, further policy tightening seems inevitable even if the pace is a little slower. Fed Chief Jerome Powell addresses the Economic Club of New York later today, and by some accounts, this could be his most important speech to date, with the market expecting to at least gain some insight for 2019. There’s a reasonable chance that the assessment could be more hawkish than many are expecting, and if this is the case, then further gains for the Greenback could be seen across the board.

The forward-looking German Consumer Confidence reading is scheduled for release at 12pm GMT today. Expectations are for a modest decline to be posted, but anything much lower could serve to rock the common currency. Support off the back of yesterday’s encouraging comments from Italy over possible concessions in the national budget debate has been somewhat limited, suggesting that risk for the Euro remains weighted on the downside. Any suggestion that German consumers are already panicking over life post-European Central Bank (ECB) stimulus would have the potential to initiate a fresh bout of Euro selling.

Brexit moves forward with more details emerging over the parliamentary process ahead of the December 11th vote. A series of all-day debates will be held starting on December 4th, and commentators suggest there’s a fighting chance that the bill could be passed at the first reading. If this is the case, then there’s the potential for the Pound to break sharply higher. Although, with politicians having the ability to make a series of amendments to the proposals, this still leaves open the fact that the European Union could again challenge the outcome.

US Wholesale Inventories data is due for release at 1.30pm GMT and has the potential to provide some insight regarding the health of the world’s largest economy. A notable climb higher will be another red flag for markets, although with the Dollar buoyed both off the back of its safe-haven status and the prospect of further rate hikes in 2019, any downside inspired by this number could prove rather limited.

GBP/USD

There have been some modest gains for the Pound through the Asian session, although upside remains limited. While further positive progress over Brexit may lend support, the pair is liable to a reversion if the Federal Reserve sets hawkish expectations for the New Year.

EUR/USD

Some modest gains have been found by the common currency in recent trade, although risk for the EUR/USD pair appears to be weighted on the downside. While the end of ECB stimulus measures should be applauded, there are growing signs that the economy will still struggle.

GBP/EUR

The Pound continues to trade in a narrow range against the Euro. Given the sluggish Eurozone economy, if the Brexit bill is passed on December 11th—and in a state that is unlikely to cause any pushback from the European Union—then a significant break higher for the pair could be seen. Ahead of this, there may be little motivation for any real direction.