The Dollar has for the second consecutive session continued to edge stronger against Sterling, the Euro and most developed currencies. While the Dollar did not react much to the Federal Reserve’s policy meeting yesterday, at which it hiked rates 25bp in line with expectations and signalled a possible further three hikes in 2019, it has today resumed a rally which started yesterday morning. Importantly, weak US macro data for August released yesterday appear to have had little impact on the Dollar while the Euro and Sterling remain under modest pressure as a result of a combination of weaker-than-expected data and more fundamental concerns. The US trade deficit widened to a larger-than-expected $75bn in August as domestic US companies were front running tariffs introduced over the summer by importing more. Core durable goods orders rose only 0.1% mom while pending home sales fell 1.8% mom following a 0.8% mom contraction in July.
US GDP growth may have thus conceivably slowed in August but market expectations, backed by the Federal Reserve, that there will be one more US rate hike before end-year are providing a solid floor for the Dollar at a time when other major currencies are again coming under scrutiny. News that the Italian government is aiming for a fiscal deficit of 2.4% of GDP in 2019 seems to have spooked markets worried about already high levels of Italian public debt. Moreover, core Eurozone CPI-inflation slowed to only 0.9% yoy in September based on preliminary data out today. EUR/USD has subsequently dropped to a 2-week low below 1.16.
Similarly, GBP/USD has slowly fallen to just above 1.30, its low since 13 September. UK GDP growth in Q1 was revised down to 0.1% qoq and 1.1% yoy while year-on-year growth of 1.3% in Q2 was revised down to 1.2% (as a result of an upward revision to Q2 2017 GDP). The bottom line is that UK growth was very weak in Q1, accelerated to 0.4% in Q2 and according to the NIERS further accelerated to 0.6% qoq inQ3. But fundamentally markets remain nervous about the impact to the UK economy should the UK and EU fail to reach a Brexit deal and the UK exit the without a deal in place.
