What had been behind this week’s sharp US Dollar rally?

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4 October 2018

thomasdodds

The US Dollar put in another stellar performance during London trading yesterday, rallying against every other major currency in the world.

A
nother string of impressive US macroeconomic data continued to show that the US economy is currently growing at a much faster pace than almost every other major economy. First up was the ADP employment number, measuring job creation in the private sector, which boded well for Friday’s nonfarm payrolls figure. This came in well above consensus at 230k, its highest level in seven months. The ISM non-manufacturing PMI also leapt to a more than twelve year high 61.6 from 58.5, a sharp contrast to yesterday morning’s underwhelming composite PMI out of the Euro-area.

We also had some hawkish comments on Wednesday from Chair of the Federal Reserve, Jerome Powell, of which sent 10 year treasury yields soaring above 3.2%. Powell talked up the ‘remarkably positive’ US economy, while stating that the current economic expansion ‘can continue for quite some time’. He also noted upside risks to inflation, while stating that the FOMC could raise rates more aggressively should inflation continue on its upward trajectory.

Yesterday’s comments from Powell make it clear that another rate hike from the Fed in December is now as close to being assured as could get. It also raises a slight possibility that we may see as many as four hikes next year, rather than the three outlined in the latest ‘dot plot’.

Euro sinks below 1.15 on soft data, Italian budget concerns

Contrastingly weak data out of the Eurozone compounded the misery for the Euro yesterday, with the currency sinking below the 1.15 mark this morning. As mentioned, the crucial composite PMI, which showed a weighted average of activity in the services and manufacturing sector, eased back again to 54.1 from 54.2, its joint lowest level since late-2016. Eurozone retail sales were also a modest disappointment, with sales contracting by 0.2% month-on-month in August.

Ongoing concerns over the Italian budget fiasco also continued to sour sentiment towards the common currency, of which has now lost two-and-a-half percent of its value in a little over a week. Italian officials have struck a defiant tone against Brussels so far this week, stated that they would not backtrack on plans for a 2.4% budget deficit target. This is despite EU officials warning the imbalance was behind the country’s recent poor economic performance.

May fails to inspire Sterling, provides no new Brexit updates

Sterling also struggled on Wednesday in the face of a rampant US Dollar and ongoing Brexit worries. Theresa May’s keynote Brexit speech at the Conservative Party conference was seen as a major disappointment by the market. Not only did the Prime Minister reiterate that a ‘no deal’ was better than a bad deal, but she also provided no real updates on the progress of the negotiations.

Yesterday’s services PMI far from helped the Pound, coming in modestly below consensus. With no data out today or tomorrow in the UK, Sterling will be driven largely by Brexit and the strength of Friday’s nonfarm payrolls report.