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Dollar Dominant

5th October 2018 Market Update

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?? USD –The Dollar has remained strong this past week; initially this was due to last week’s forward guidance which forecast interest rates increasing once in December 2018, three times in 2019 and once more in 2020. However since then, the greenback has received further boosts from better-than-expected economic data this week which has helped to paint a rosy picture of the US economy as a whole, with US consumer sentiment now at a 17-year high. In turn, this helped the yield on 10-Year US Treasury bonds to reach their highest levels since May 2011 yesterday, which has caused further demand for the dollar as investors pour in to achieve a better guaranteed return than they would otherwise receive on cash. So with everything well set for the US economy and the Dollar, better than expected nonfarm payroll data could well this strength story continue.

?? GBP – Sterling appears to have that Friday feeling this morning as it hit a three-month high against the Euro, whilst also making gains against the Dollar. As you could probably guess, the main cause for these moves is a positive tone towards Brexit negotiations. Indeed, for Sterling investors – Brexit has been a persistent handicap towards a sustained recovery for the Pound, but with some signs of progress on key issues this week, news this morning has EU Brexit negotiators claiming that a divorce deal with Britain was ‘very close.’ However, you would be forgiven for feeling a sense of déjà vu when it comes to these positive Brexit headlines and promises of progress. Having experienced a series of false dawns over the past month, it remains to be seen if anything concrete can be agreed. In addition, with the added hurdle of having to get the support of those in the House of Commons before any Brexit deal may be implemented, there is still plenty of work to be done before the Article 50 EU dinner hosted by President Tusk on October 17th.

?? EUR – Over the course of this week, we had seen concerns ease over the Italian Budget issue, alongside this morning’s better-than-expected German August factory orders, which had increased hopes of a more stable Euro. However, with life never being quite so simple – news this morning out of Italy has the Italian government forecasting their 2019 GDP growth at 1.5%, which is much higher than market consensus. Given that the budget plans of the Italian populist government are heavily based on the success of the Italian economy, an overly optimistic view of economic growth could well spell longer term issues were the nation to fall short of expectations. If we throw in the slowing growth across the European Union as a whole, as well as the ongoing threat of trade wars – the Italian economy has the potential to throw a spanner in the works of any continued Euro stability in the long term.

 

Summary: 
USD: The Dollar is looking to end this week on a high with important employment data out later today holding the potential to further support a burgeoning US economy;
GBP: More positive Brexit headlines this morning have helped Sterling towards a three-month high against the Euro, whilst also making strides against the Dollar;
EUR: Just as the European markets attempt to move on, Italian budget issues continue to rear their ugly head.

 

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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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