Global risk sell-off buoys US Dollar

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29 October 2018


The global flight from risk continued last week. Equity markets fell sharply, and the significant fall in US Treasury yields that we have seen since last month’s highs is providing little support to global risk sentiment, for now.

conomic data appears to have taken a soft turn lately; in particular, the Eurozone PMIs of economic activity tumbled unexpectedly, further damaging market sentiment. This time the US Dollar behaved as a risk haven amid investor nervousness, rising against every G10 currency, save the Japanese Yen.

This week, Eurozone inflation on Wednesday and the US monthly payrolls report for October will be the main macroeconomic news for FX markets. In addition, currency traders will be keeping one eye on the developments in risk markets and the headlines surrounding the Italian budget conflict, including the widening spreads between Italian debt and that of the rest of the Eurozone.

Major currencies in detail


Sterling took the risk sell-off particularly badly last week. In addition to the Dollar rally, leaks that the UK cabinet reached an impasse over what concessions to make to the EU in order to restart the deadlocked Brexit negotiations spooked markets, and the Pound was the worst performing G10 currency last week.

Sterling looks increasingly oversold to us, however. As we go into the Bank of England’s ‘Super Thursday’ announcement, even a mildly hawkish tone of communications from the MPC could trigger a significant rally, particularly if risk sentiment worldwide stabilises this week.


The disappointing PMI business activity data adds to the worries generated by the previous month’s downward surprise in Eurozone inflation. So far, however, the ECB remains unfazed by the weak data. President Draghi made it clear at the ECB’s October meeting last week that he sees the weakness as temporary, and sees no reason to change the central bank’s stance just yet. Regardless, the Euro has not been helped by either the data or the atmosphere of risk aversion, and has broken out of the recent range to the downside against the US Dollar.

In this context, the flash Eurozone inflation release on Wednesday takes on additional importance and will be closely watched by markets.


Economic news out of the US was mixed, though clearly better than in the Eurozone. The backward looking GDP numbers for the third quarter were strong, but more recent housing market activity seems to have taken a tumble as mortgage rates climb.

This week’s payroll report on Friday should settle the question. However, at this point we see no reason to doubt the strength of the US economy. As always, the key data point will be whether labour market tightness is translating into upward pressure on wages.