A steady U.S. dollar kept close to early 2016 highs against a handful of rivals. The dollar has been on the rebound since August, helped by the U.S. economy showing signs of shaking off its lackluster start to the year which has helped embolden Federal Reserve officials to talk up the possibility of an interest rate hike this year. Moreover, political risk has been kept in check by polls indicating a likelihood of the Democrats retaining the White House over the coming years. Dollar outperformance, meanwhile, has been enhanced by the notion that central banks abroad are far from following in the Fed’s higher rate footsteps and may even need to double down on stimulus. The rosiest German business morale in 2 ½ years helped the euro steady above seven-month lows. Data today on U.S. consumer confidence is forecast to inch down from 9-year highs.
The euro had its descent slowed somewhat by the rosiest German business confidence in 2 ½ years. Germany’s influential Ifo survey unexpectedly brightened by a point to 110.5 in October, the highest since April 2014. Nevertheless, the biggest driver of the euro these days is a negative one: central bank policy divergence between the rate hike favoring Fed and the ECB which may need to double down on stimulus to help it reach its still out of reach inflation goal of almost 2 percent.
The Aussie dollar strengthened by a half percent on the eve of local inflation data that might dampen prospects for the Reserve Bank of Australia to slash borrowing rates from 1.50 percent. Forecasts call for headline inflation to firm by a tick to 1.1 percent annually during the third quarter. Should the data underwhelm, chances of a rate cut would increase and risk pulling the Aussie downward.
Sterling steadied ahead of remarks today by Bank of England Gov. Mark Carney. Any dovish tone that suggests more stimulus might be necessary to beat back the downside risks to the economy from Brexit would leave the pound vulnerable to renewed weakness. Also in focus this week is Britain’s third quarter economic report card, due Thursday. Recent U.K. data have shown resilience in the face of Brexit uncertainty. Should the U.K. economy fare better than expected (forecasts call for growth to moderate to a 0.3 percent quarterly rate from 0.7 percent in Q2) the market might reward the pound with a rally of a cent or more.
The yen flirted with late July lows, a reflection of how vulnerabilities have resurfaced for this year’s best performing major currency. USDJPY has bounced back as market conviction grows in the Fed raising interest rates. Moreover, demand for safe havens from U.S. political risk has all but evaporated with polls indicating a likelihood of Hillary Clinton and the Democrats retaining the White House over the next four years. Market positioning and how many remain long the Japanese currency suggest the yen could have the most to lose should the dollar rally prove a meaningful one.
The loonie recovered from seven-month lows after carefully worded comments from Stephen Poloz, the governor of the Bank of Canada, suggested policymakers may not be as close to cutting interest rates from 0.50 percent. Oil wavered but kept above $50, the upper bound of its recent range. Huge risk events await the loonie next week in the form of Canadian trade and jobs data – not to mention America’s monthly jobs report – on Nov. 4.
Markets pricing in a more than 70 percent chance of a U.S. rate hike this year kept the dollar’s bullish bias intact and the U.S. currency around February highs. The week is off to a solid start for the U.S. economy as factory data Monday showed the strongest activity in a year. Today brings a critical look at U.S. consumer confidence which comes two weeks before the election and is forecast to ebb slightly from 9-year highs the previous month. The week’s main event is America’s third quarter report card on Friday that’s forecast to show the economy finally shifted into a higher gear that’s proven elusive for several quarters. If it did, the Fed would be more inclined to raise rates which would be good for the dollar.
Deliver the Daily Currency Market Analysis to my Inbox
Published five days a week, this newsletter provides day-to-day trends and activities affecting the market in easy-to-understand snapshots.