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Dollar looks to Data for Hangover cure

7th December 2018 Market Update

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🇺🇸 USD – The Dollar is nursing a hangover this morning after experiencing a day to forget yesterday as increasing speculation that the Federal Reserve is looking to take a pause from its steady rate hike cycle in 2019 saw it weaken off. This is after the Wall Street Journal reported last night that while a rate hike in December was still on the cards, the state of the US economy would be the main driver of any further interest rate increase as the Fed was looking to take a ‘wait and see’ approach. Luckily we don’t have long to wait as today sees the release of November US non-farm payrolls, unemployment and wage data with expectations that we will see strong data across the board which is likely to help prop up the dollar. This could also help abate the concerns around the fall in US Treasury Yields. As a reminder, investors are always on the hunt for yield – but if US Treasuries aren’t providing as much as they like, they are likely to invest in other non-Dollar denominated assets. This causes the Dollar to weaken as demand for it falls. Linked to this, an inversion in the yield curve is a leading economic indicator for a sharp economic slowdown down the line; history tells us this normally happens one to two years following an inversion – so another reason for markets to be cautious. That being said, these fears aren’t limited to just the US as concerns over global growth are on the up. As a result, some safe-haven demand for the greenback has helped to keep any larger dollar weakness at bay; at present, the OECD estimates that global growth with slow from 3.7 per cent to 3.5 per cent this year.

🇬🇧 GBP – Sterling fell off slightly this morning as it heads for a fourth consecutive week of losses as Theresa May looks to press ahead with the all-important Parliamentary vote set to take place next Tuesday. This is despite concerns that a large loss may well topple her government. As the odds remain stacked against her, it would appear that the PM is getting more and more desperate as time ticks down towards the 11th December. The latest update out this morning indicates that yesterday, the government sought to find a compromise to win over rebels by offering a Tory backbench amendment that would offer MPs more of a say on the Northern Ireland backstop. Unfortunately, this appears to be a case of ‘too little, too late’ for MP’s as DUP leader Arlene Foster dismissed the PM’s offer as ‘legislative tinkering.’ In terms of the rates, Sterling had a better day yesterday as it was propped up by the Dollar weakness mentioned above – but this morning we have seen it move back down towards the lower end of its range. As a reminder – it hit an 18-month low of $1.2659 against the Dollar on Wednesday as volatility increases as we approach the big vote in Parliament. Interestingly, there had been some talk of a delay in the vote to allow May to convince more MP’s to support her, but this has since been quashed. We expect Brexit headlines over the weekend to dictate Sterling’s fate come Monday morning.

🇪🇺 EUR – This morning it seems prudent to focus on Germany given that Europe’s largest economy’s struggles showed no sign of ending as this morning’s Industrial production numbers dropped by 0.5% MoM in October from a 0.1% drop in September as German industry remains flat. The main cause for this was a fall in the production of consumer goods. This is after a summer in which the German industry experienced severe production delays in the automotive industry as concerns around the German economy have remained prevalent in the second half of 2018. As the months have gone on, it has been increasingly difficult to defend the continued stream of poor German economic data as a blip or a one-off. But there remains some cause for optimism as low-interest rates and strong loan growth in the German corporate sector, indicate a longer-term increase in investment. In addition, new orders out yesterday recorded their third monthly increase in a row. In terms of the rate, the continued Euro weakness means that the sharp decline in the Dollar caused only a modest increase in EUR/USD last night.


USD: Dollar broadly weaker yesterday as concerns over US Treasury yields and questions over the Fed’s likely rate path add to market concerns;
GBP: Sterling set for fourth week of losses as we await Parliamentary vote on Tuesday;
EUR: German industrial data disappoints as Europe’s largest economy brings a sad second half of the year to a close.


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Darren Kilner

Darren Kilner

Darren is Head of Dealing at FairFX. Darren lives and breaths FX, his Mastermind topics are G8 currencies and economic forecasts.

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