Dollar rebounds, can UK growth figures boost Sterling?

Today's news headlines:

  • ‘Dollar supported by hawkish Fed’. The Federal Reserve kept interest rates steady but reaffirmed its monetary tightening stance. (Reuters)
  • ‘German trade surplus narrows as U.S. trade friction bites’. Exports unexpectedly fell by more than imports in September. (Reuters)
  • ‘Chance of no-deal Brexit holds firm at one-in-four as clock ticks - Reuters poll’. The EU would have to see a breakthrough on Brexit within a week if its leaders are to endorse any deal with Britain this month. (Reuters)

Yesterday was relatively light on fundamental data, but the presence of two key themes certainly helped provide some meaningful direction for major currencies. The Federal Reserve’s penultimate rate-setting meeting for the year produced no change, but a hawkish tone was maintained despite previous concerns that 2019 would see the US economy begin to slow. On top of this, the European Commission reported that growth in the Eurozone is expected to moderate in the New Year as a myriad for political factors, ranging from Brexit unknowns to US trade policy, bite. The net result has been fresh gains for the Dollar – notably the DXY Dollar index – which has now added over 1% since the post-midterm election lows on Wednesday.

Yesterday’s news of a contracting trade surplus from Germany underlined the extent of the wide-reaching implications of the current tariff-driven US trade policy. However, it was still the hawkish tone from the Fed—rather than this data release—which served to heap pressure on the common currency during Thursday’s trade.

Looking ahead, 9.30am GMT today sees the publication of UK Gross Domestic Product (GDP) data for Q3 which is expected to show a significant uptick to 1.5% year-on-year. With monthly data now being released too, the idea is that flash readings should take on a little less significance. Although, given the current skittish state of markets, traders will almost inevitably still be happy to sell down the Pound—which has made good ground this week—in the event of any shortfall.

Across the Atlantic, the week is set to finish on a rather muted tone too. However, the Michigan Consumer Sentiment reading may be able to provide some direction in the short-term, especially if this number fails to match up to expectations. Employment may be strong, but with the prospect of interest rate hikes continuing for some time yet and import tariffs hitting purchasing power, the metric is already expected to be tailing off. Anything that comes in much below the anticipated print of 97.9 has the potential to initiate some Dollar selling. Given those gains for the Greenback in the wake of the midterm elections, there’s certainly the scope for some profits to be taken if the fundamentals dictate. 

While progress over Brexit will be keenly watched both in the weekend media and also into next week, readings such as next Tuesday’s UK inflation print will remain very much in focus. The door remains open for the Bank of England (BoE) to react with further rate hikes in the event of inflationary pressures, although recent stability for Sterling is likely to help moderate pressure on at least some import prices. That said, markets are expecting a reading of 2.4% next week, which would start to creep towards the upper range of expectations, meaning any overshoot could provide further support for the Pound.

GBP/USD

In the wake of yesterday’s hawkish note by the Federal Reserve, Cable has slipped, and although the GBP/USD pair is currently holding just above 1.3000, downside pressures remain in force. With a relatively data-light session from London, unless there’s a meaningful bounce in the GDP figure, further losses could follow.

EUR/USD

The EUR/USD pair has now lost around one and a half cents since the outcome of the US midterm elections, with yesterday’s downbeat assessment over growth from the European Commission heaping further pressure on the common currency. An overshoot in the US consumer sentiment reading could open the way for a test on fresh 16-month lows for the Euro.

GBP/EUR

The GBP/EUR cross has tested six-month highs in recent hours, and although gains have been ebbing away early in the European session, any renewed concerns over the Italian budget situation could readily see the common currency slide further, even with the Brexit uncertainty.