Dollar’s safe-haven status provides a big draw

Today's news headlines:

  • ‘US new home sales near two-year low as mortgages rates rise’. This is the latest indication that rising mortgage rates and higher prices have been sapping demand for housing in the US. (Reuters)

  • ‘Eurozone economic confidence hurt by global trade war’. Trade tensions send the Eurozone’s Composite PMI to its weakest level since 2016. (Financial Times)

  • ‘PM deploys “emotional” speech to see off threat from Brexit critics’. After last night’s showdown, there seems to be little sign of a leadership challenge for Theresa May. (The Guardian)

  • ‘ECB faces challenges over Italy, Brexit – and its own strategy’. Investors will closely watch Mario Draghi’s appearance today as he’s likely to face questions about volatile political events. (Financial Times)

As the economic calendar flickered back to life yesterday, the general mood was one of disappointment. Trade fears hit the Euro, while a lack of political clarity in the UK did nothing to favour the Pound. The Greenback is gaining some ground off the back of its safe-haven status with the DXY Dollar index pushing towards fresh highs for the year, but again, the numbers from the US – both in terms of economics and corporate earnings – have generally been lacking. 

The European Central Bank’s (ECB) regular statement following the monetary policy meeting is scheduled for 12.45pm BST today, and although there’s no expectation that we’ll see any change in headline interest rates, it’s going to be the tone in the accompanying press conference that will be most important. Expectations had been building that Mario Draghi may manage to hike rates at least once before his term as ECB chief expires next October. However, with yesterday’s disappointing Composite Purchasing Managers’ Index (PMI) reading being seen as a direct consequence of global trade tensions, anything that causes this date to pushed back could initiate further Euro selling. The Composite PMI dropped from 54.1 to 52.7, despite forecasts for a smaller fall to 53.9. 

US Durable Goods Orders data for September is on the cards for today at 1.30pm BST, and expectations are for this number to tumble into contraction. With the Dow Jones index sliding into negative territory for the year yesterday, Donald Trump’s economic experiments are looking increasingly short-sighted. Although today’s trade balance data may provide some respite, a sharp contraction in the durables figure will still have the potential to raise questions over the sustainability of the ‘America First’ approach. That said, the Dollar’s safe-haven status and the fact other major currencies are also embattled right now, has the potential to leave the Greenback as the overall winner. 

The UK economic calendar remains downbeat for the remainder of the week, leaving the focus very much on Brexit. Theresa May managed to avoid a leadership challenge in her address to Conservative MPs yesterday, although this provides no further clarity over the situation. The UK is by all accounts heading for a no-deal Brexit, which still leaves her tenure looking rather vulnerable. If the government loses the support of the Democratic Unionist Party (DUP), then the idea of a general election will once again be back on the table.

GBP/USD

The pair broke to its lowest level this month during yesterday’s trade; although there has been something of a rebound overnight. Short-term support may come off the back of the quiet UK economic calendar, although given the current trajectory of Brexit and the risk this holds with regard to overseas investment, the longer-term outlook likely remains negative.

EUR/USD

The EUR/USD pair hit two-month lows during yesterday’s session, with the bulk of the sell-off being seen on the back of those disappointing PMI figures. The ECB’s stance over rate hikes will be key in determining which way the pair goes next – recent history suggests that Mario Draghi will take the glass half full view, but failure to do this would open the door for further selling pressure.

GBP/EUR

The Pound is holding relatively steady against the Euro of late. Despite the inbound investment question hanging over Sterling, any suggestion from the ECB that it may have to push back a rate hike in 2019 will have the potential to add further upside here, at least in the short-term.