Dollar marches higher on hawkish Fed, Brexit woes weigh on Sterling

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12 November 2018

thomasdodds

The Dollar rose towards fresh highs against its major peers late last week, as a hawkish Federal Reserve and fall in equity markets overshadowed doubts over President Trump’s ability to force through additional fiscal stimulus following the US midterm elections.

T
here were no real surprises whatsoever in last week’s US congressional midterms, which evolved broadly in line with what the opinion polls suggested. Trump’s Republicans were able to retain control of the US Senate although, in a blow to the President’s plans to force through additional tax stimulus, the Democrats regained control of the House of Representatives for the first time in eight years.

The political uncertainty of a deviation from the status quo initially weighed on the greenback, as the release of more and more states began to show that a Democrat win in the lower chamber was becoming increasingly likely. The greenback did, however, claw back all of these losses over the course of the week, even managing to end the week higher against the Euro following Thursday’s upbeat statement from the Federal Reserve.

News on the Brexit front is likely to remain prevalent in the currency markets this week. Aside from that, US inflation and retail sales data will be worth keeping tabs on.

Major currencies in detail

GBP

Sterling sank to a more than ten day low on Monday morning, with doubts over a Brexit deal and a flight from risk souring sentiment towards the Pound. Disagreements within the Tory Party over how to proceed with Brexit, typified by the resignation of transport minister Jo Johnson on Friday, highlighted just how challenging it will be for Theresa May to get any EU exit agreement through parliament.

This week is a data heavy one in the UK, with Tuesday’s labour report, Wednesday’s inflation data and Thursday’s retail sales numbers all on the docket. Aside from any surprises here, developments on Brexit remains the main driver ahead of the 13-14th December EU summit.

EUR

Last week proved to be a relatively quiet one in the Eurozone, with the single currency largely driven by the US election results, Federal Reserve announcement and Brexit uncertainty.

That being said, we did see a modest upward revision to the crucial composite PMI number. This key indicator does, however, still remain around its lowest level in two years, suggesting that the Euro-area economy is likely to put in another soft performance in the fourth quarter following a fairly disastrous Q3. Activity is similarly light on the ground in the Euro-area this week and the Euro is likely to be driven largely by events elsewhere.

USD

The Federal Reserve delivered another unambiguously hawkish assessment of the US economy last Thursday, further raising hopes of an interest rate hike from the central bank when it next meets in December. Policymakers stated the US economy ‘has been rising at a strong rate’, while talking up ‘solid’ jobs gains and growing household spending. These comments all but confirm, in our view, that it would now take a fairly significant financial market event to derail a fourth interest rate hike in the calendar year from the Fed next month.

Attention in the US this week will be squarely on Wednesday’s inflation data and Thursday’s retail sales numbers, both of which have the potential to shift the greenback.