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Dollar falls as Fed signals end of rate hikes

By Jake Trask

Sterling traded in a relatively narrow range throughout the European session yesterday as news from Westminster re: Brexit quietened a touch compared to recent weeks. Headlines were made instead by a pair of reports about the potential impact the UK secession from the EU could have on the UK economy. The first publication was based on government analysis which gave estimates on future growth resulting from a no-deal scenario or Prime Minister, Theresa Mays exit plan. After 15 years the economy would be 3.9% smaller under Mays plan however exiting without a deal would result in a 9.3% loss the authors said. Later in the day we had the Bank of England’s own forecasts made public which laid out a more serious picture of how no-deal would impact the UK economy. A disorderly exit from the EU could lead to recession resulting in an 8% dip in GDP, houses prices dropping a third and sterling’s value falling by a quarter it stated. Despite the gloomy prognosis GBP/USD held above its opening level of 1.2745 throughout the day with traders likely remembering the Bank of England’s doom and gloom predictions of what would happen to the UK economy if it voted to leave the EU, which never materialised. GBP/USD in fact rallied at the end of the day on news from the States. GBP/USD currently trades at 1.2775 after trading above 1.28 throughout the Asian session.

There was big move in USD across the board yesterday as US Federal Reserve Chairman, Jerome Powell reset expectations of domestic monetary policy. At a speech at The Economic Club of New York, Powell painted a rosy picture of the current economic situation however stated that interest rates were “just below the range of estimates of that level that would be neutral for the economy that is neither speeding up or slowing down growth.” Although a hike in December is all but assured it appears the Fed is ready to pause hiking sooner than was previously expected. Markets now predict two hikes for next year instead of three with one hike being a 50/50 shot. The dovish statement saw the greenback dumped, likely to the pleasure of US President Donald Trump. USD/JPY has fallen from 114 to close to 113 and EUR/USD has bolted from around 1.1275 to make a play for the 1.14 handle. The Dollar Index which measures USD against a basket of other currencies fell from 97.5 to around 96.7. This evening sees the latest Federal Open Market Committee minutes released so there is the potential for further losses should this also carry a dovish tone.

It’s been a relatively quiet 24 hours from the Eurozone with little economic data of note and no new developments from Italy re: their contentious budget. Friday sees the latest inflation data being released by Eurostat with the headline level expected to drop from 2.2% to 2.1%. The core reading which strips out the costs of food, energy, alcohol and tobacco is predicted to hold at 1.1%. The shared currencies moves will likely be dictated by dollar sentiment until any further developments emerge from Rome re: their future spending plans. GBP/EUR is at 1.1240.

The Aussie has got a boost on the back of dollar weakness with AUD/USD jumping from around .7230 to peak at .7325. The commodity currencies have rallied along with global stock markets as expectations of the pace of US interest rate hikes are scaled back. The one big data-set from Australia overnight was the Private Capital Expenditure q/q which showed an unexpected drop of 0.5% for the quarter when a 1.1% gain was predicted. This miss did little to the local buck’s value however as Fed chief Jay Powell’s dovish statement reverberated around world markets. GBP/AUD is at 1.7450.

There has been a recovery in the Canadian dollar’s value over the past 24 hours as the losses incurred from falling oil prices were offset by the global dollar sell off. USD/CAD was looking like it may push through the 1.34 level for the first time since June 2017 however after peaking around 1.3360 it quickly retraced to 1.3240. The positive move for CAD will be short lived however should Brent crude continue to drop. The global benchmark has fallen from around $86pb to $58pb in just two months. GBP/CAD trades at 1.6960.

NZD/USD has jumped from .6790 to around .6880 over the past 24 hours as a risk on environment benefits the commodity currencies. Last night’s major release from New Zealand was the ANZ Business Confidence survey which held steady at -37.1. GBP/NZD is at 1.8590.