Dollar hits 3 months highs on solid US inflation news

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14 February 2019

thomasdodds

The US Dollar rallied by around half a percent against its major peers on Wednesday afternoon, buoyed by slightly better-than-expected inflation data out of the world’s largest economy.

E
xpectations for Federal Reserve interest rate hikes have been dealt a significant blow in recent weeks, primarily due a slowdown in global economic growth and a marked drop-off in US inflationary pressures. Yesterday’s inflation news did, however, raise some faint hopes that the Federal Reserve could hike interest rates at some point later in 2019.

The core measure of price growth, which strips out the volatile energy component, came in at 2.2% for the third straight month, better than the 2.1% economists had pencilled in. Headline inflation also beat expectations at 1.6%. While now comfortably below the Fed’s target, this helped send the EUR/USD rate back below the 1.13 mark and its lowest level in three months.

Attention today now turns to this afternoon’s US retail sales for December, delayed due to the longest shutdown in US government history.

Euro one of the worst performing major currencies

The Euro itself was one of the worse performing majors yesterday, extending its rather sharp decline since the end of January and briefly touching its weakest position since mid-November.

A number of factors have driven the decline, predominantly a continued softness in EZ economic data, political trouble in Spain and optimism over a US budget deal. While Trump has expressed frustration at the proposed deal, given it only provides funding for 55 miles of wall along the Mexico border, he appears opposed to another government shutdown, which is good news.

Positive developments over US-China trade relations could provide investors with reason to reverse some of their recent US Dollar safe-haven flows in the coming days. Chinese President Xi is, on Friday, due to meet with members of the Trump administration, with another meeting between Xi and Trump himself possible sometime in March. Investors are growing generally more optimistic over a trade deal, particularly following comments from Trump that the 1st March deadline for a deal is likely to be wavered.

Sterling hits new lows on Brexit, soft UK inflation

Reports that Theresa May was set to offer MPs a chance to either accept her deal or extend Article 50 briefly buoyed Sterling on Wednesday. The UK currency was, however, back on the defensive again as trading progressed after this report was denied. With little sign that May has achieved any form of concessions from the EU regarding the NI ‘backstop’, investors are gearing up for her deal to once again be shot down in another parliamentary vote, likely to take place in a couple of weeks time.

Wednesday morning’s fairly soft UK inflation figures also provided little incentive for investors to buy the Pound yesterday, helping drag the UK currency to its weakest position against the US Dollar since mid-January. UK inflation sank to just 1.6% in January (Figure 1), its lowest level in over two years and comfortably below the Bank of England’s 2% target.

Figure 1: UK Inflation Rate (2013 – 2019)

Expectations for another hike from the BoE in 2019 have been dealt a significant blow in the past few days, with a combination of prolonged Brexit uncertainty, weak fourth-quarter GDP numbers and January’s underwhelming inflation print ensuring that our call for a hike in the latter stages of this year is now in serious jeopardy.