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Dollar dives as Powell hints at pause in rate hikes.

By Jake Trask

It’s the beginning of a crucial couple of weeks for the pound as Parliament returns from its Christmas break today ahead of Brexit debate scheduled to kick off Wednesday. Parliament is due to vote next Monday or Tuesday on Theresa Mays withdrawal agreement with a defeat looking likely for the PM. If it is defeated then Speaker John Bercow will likely allow time for more debate and another vote on the matter given the gravity of the situation. Sterlings value will be dictated by news re: voting intentions, the vote itself and the chances of another vote should Mays plan fall first time of asking. Fridays saw the monthly Services PMI released from the UK with the normally closely followed print beating forecast of 50.7 coming in at 51.2. Sterling barely moved on the release as no one is taking much notice of data at present given the hold politics has over the pound. GBP/USD is currently at 1.2750.

It was a topsy-turvy end of the week for the greenback as it rallied on a strong Non-Farm Payrolls release before being sold off on the back of dovish comments from Fed Chairman, Jay Powell. The monthly jobs report showed an increase in employment for the month of 312k, its highest number since the 313k shown in March’s report. Wage growth also beat forecast with a monthly uptick of 0.4% reported however countering these good numbers was an unexpected increase in the level of unemployment which went from 3.7% to 3.9%. The dollar reacted positively to the numbers with the greenback gaining around half a cent against the pound and the euro. The gains were quickly unwound though as Fed Chairman, Jay Powell issued a dovish message on the path of 2019 interest rate hikes saying the central bank would be “patient” with further tightening of monetary policy. The comments came at the American Economic Associations annual meeting in Atlanta where Powell was joined by his predecessors, Janet Yellen and Ben Bernanke to discuss the state of the economy. EUR/USD pushed back up through 1.14 on the news with USD/JPY coming close to falling below 108. Stock markets in the States also rallied on the news having been hammered over recent months on the back of Trumps trade offensive.

Friday's big data from the Eurozone was a slightly under par inflation print with the overall reading coming in at 1.6% from a downwardly revised 1.9%. The core reading held steady at 1%, around half the target level. There was little reaction from the shared currency however with markets primarily concerned with the timing of when European Central Bank chief, Mario Draghi will look to raise interest rates. Sometime in Q3 is the general consensus at the moment and this slightly weak data hasn’t done anything to change this prediction. GBP/EUR trades at 1.1135.

After falling below .70 for the first time since Feb 2016 last week, AUD/USD has staged a recovery over the past two trading sessions picking up to .7130 at present as the dollar sell-off benefited the Aussie. Tonight sees trade balance numbers for November being released from Down Under with a surplus of AUD2.2b expected. As always developments re: trade between the US and China will have the most impact on the Aussies value in the short term. US officials are set to begin discussions in Beijing today aimed at helping bring an end to the dispute. GBP/AUD sits at 1.7835.

The past few days has seen some big moves in USD/CAD with the rate falling from 1.3640 to currently trade around 1.3350. The aforementioned dollar sell off and some strong employment figures from Canada seen on Friday helped strengthen the loonie. A recovery in oil prices has also benefitted CAD with Brent pushing back up towards $60 a barrel. It’s a key week from Canada with the Bank of Canada expected raise interest rates to 2% this Wednesday lunchtime. As with most central bank decisions it will be the accompanying message conveyed in BoC chief, Stephen Poloz’s press conference that will be the main talking point. GBP/CAD trades around 1.70.

It’s a very quiet week ahead from NZ with little data of note to distract the fx markets. Risk on trade on the back of Jay Powell’s dovish comments have boosted the kiwi over the past couple of trading days. Any positive news emanating from the US/China trade talks will add further support to the local buck. GBP/NZD trades around 1.8830.