US Dollar rally stalls, Sterling rebounds off record low

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14 October 2016

thomasdodds

Sterling continued to trade near its record low in trade-weighted terms on Thursday. Investors were in a cautious mood following the recent sell-off in the Pound that has seen the currency shed around 6% of its value against the Dollar in just over two weeks.

T
he political uncertainty that has plagued the UK so far this year continued to dominate the headlines, with the start of a High Court case on whether parliamentary approval would be needed to trigger Article 50 causing investors to temporarily steer clear of the UK currency. Earlier in the week, Prime Minister Theresa May ruled out letting Parliament vote on triggering the Brexit process, although claimed lawmakers would have every opportunity to debate exit plans.

In the US, the Dollar lost ground against the Euro despite receiving decent support following Wednesday evening’s Federal Reserve meeting minutes. Chair of the Federal Reserve Janet Yellen will be speaking at a macroeconomic conference in Massachusetts at 17:00 UK time today and is expected touch on the topic of monetary policy.

Yellen’s comments are likely to remain in line with Wednesday evening Fed minutes, given economic data since the September meeting has come in broadly as expected. Any additional rhetoric hinting at a 2016 hike will ramp up bets on December, with markets now pricing in more than a 70% chance of a rate increase before year-end.

The latest set of US retail sales figures at 13:30 UK time will also be worth watching. Consensus is for decent but undistinguished growth around 0.6%.

Governor of the Bank of England Mark Carney will also be speaking with a number of his MPC colleagues at an event in Birmingham today, with the economic fallout from the Brexit vote likely to be high on the agenda.

Major currencies in detail:

GBP

The Pound steadied itself for the second day, rallying 0.6% against the US Dollar, back above the 1.22 level.

The latest poll of top economists by Reuters yesterday suggested that the Bank of England could be on course to slash interest rates for the second time before the end of 2016, although opinion remains very much split. Yesterday’s poll showed that just over half, 27 out of 53 respondents, expected the Bank rate to be lowered in December. We think this remains a possibility, although we would have to see a marked slowdown in economic data in the coming weeks.

Economists are also now expecting price growth to accelerate to 2.3% in 2017 as the effect of a weaker Sterling drives up inflation.

With no economic releases today, attention remains firmly on political developments in the UK.

EUR

The single currency rose 0.3% yesterday despite the latest poll of economists suggesting that the European Central Bank will extend its quantitative easing programme at the end of the year.

Thursday’s Reuters poll showed that over 90% of top economists now expect the ECB to extend its QE programme by at least six months at the central bank’s December meeting. We think that we’re likely to get a firm hint that an extension could be on the way at the next meeting in October.

On the data front, inflation in Germany remained unrevised at 0.7%, boding well for Monday’s Euro-wide number.

The Euro will likely be driven by events elsewhere again today, with trade balance data this morning unlikely to rock the boat.

USD

Support for the Dollar following Wednesday’s Fed minutes proved short lived, with the USD index dipping 0.3% yesterday.

Jobless claims went from strength to strength last week, continuing to suggest that the US labour market remains in good health. Claims came in at a 43 year low of 246,000 last week, with the four-week moving average falling to 249,000.

Central bank member Patrick Harker also spoke yesterday, claiming that the US economy was doing ‘pretty well’, with the labour market strong. Harker suggested that the Fed is not influenced by the Presidential Election, which could open the door to a rate hike as soon as next month.

Today marks a particularly busy day in the US, with Yellen’s speech and retail sales key.

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