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USD outlook for 2019 shifting rapidly

By Hamish Muress



What we can learn from the first few trading days of 2019 is that sterling is not sure of its footing at the moment with yesterday’s performance erasing most of the losses seen the day before. At the moment it would appear that sterling bulls and bears are evenly matched but any update out of No.10 could quickly change things. MPs are beginning to trickle back to Westminster so expect next week to see the rhetoric ramp back up. Construction PMIs slipped back yesterday although their impact is minimal compared to today’s Services data for December. The month before services output hit its lowest level since the referendum suggesting growth came to a halt during the month.

In the space of a few weeks the outlook about Federal Reserve interest rates for 2019 has taken a huge u-turn with markets going from pricing in 3 interest rate hikes, to two and then zero for the year. Indeed, yesterday the conversation shifted one step further with some suggesting that interest rates could infact be cut by the Fed at the back end of the year. If this were to be the case 2019 could be a difficult year for the dollar and whilst there would still be a large gap between Fed and ECB rates that would still narrow especially if the ECB hiked rates themselves. Meanwhile in Washington the Democrats took charge of the House of Representatives where Nancy Pelosi was once again sworn in as speaker of the House. As a first step the Democrat controlled House voted to end the partial government shutdown in a futile move with the bill set to be vetoed by President Donald Trump. For Fed Chair enthusiasts as well today is exciting with Jerome Powell forming a reunion with previous heads Janet Yellen and Ben Bernanke. Hopefully it will be better than the Inbetweeners reunion

The European Commission announced yesterday that now fresh Brexit talks were planned and that the deal that is currently being considered is the best and only deal available. No change there then. Elsewhere from Brexit it was relatively quiet day for the Euro but today will see the release of euro area inflation which is expected to come in at 1% year on year. This is always crucial for the ECB who have been dogged over the last few years with regards to sluggish inflation.

The Aussie dollar managed to stem its losses seen earlier in the week off the back of China uncertainty. Indeed Chinese stock markets have bounced back from their steep losses. The Aussie dollar is often seen as a proxy for the sentiment around China and with Chinese growth facing headwinds, 2019 could be a difficult year for the Aussie as well.

The Canadian dollar managed to recover ground against its US counterpart yesterday following the wave of sentiment sweeping across the market regarding Fed interest rate cuts. Canadian employment figures will be released today alongside the larger US numbers and they are expected to show unemployment rates stay around 5.7%.

The New Zealand dollar followed the Aussie recovering some of its loses against the US dollar overnights following the bounce back in Chinese markets. Moving into the weekend there isn’t much for the New Zealand dollar to trade on and the rest of January looks a little light data wise. In the meantime then the Kiwi should be taking its moves from Asia and China.