It has been another down day for the Dollar which has weakened to a 3-week low in trade-weighted terms despite the release of a larger-than-expected rise in the Philadelphia Fed manufacturing index to 22.9 in September from 11.9 in August. The index typically correlates closely with US GDP growth and suggests that the US economy in Q3 grew at a similar rate as in Q2 (4% qoq annualised) and markets continue to price close to two more 25bp Fed rate hikes this year and a further 50bp of hikes in 2019.
However, this is not translating into Dollar strength. There are a number of possible explanations, including the fact that other major currencies, including Sterling, the Swiss Franc and Kiwi Dollar are benefiting from robust domestic macro data and in the case of the Norwegian Krona from a central bank which has started to hike its policy rate. More generally, a rebound in global risk appetite in risk appetite has seen emerging market currencies stabilise which has worked against the US Dollar and Japanese Yen.
Sterling had another leg up today and is now up 2.5% since end-August to a 4-month high in trade-weighted terms. The catalyst was better-than-expected retail sales data for August, with the volume of sales rising 0.3% mom and 3.3% yoy. Despite still very weak real wage growth UK consumers have continued to spend both on-line and in stores.
Moreover, there are signs even if tentative that some EU member states are keen to get a Brexit deal signed with the UK after a 2-day day Summit of heads of state in Salzburg which ends today. However, the largest EU member states, namely France and Germany, are still seemingly sticking to their long-held stance that the UK should not be given preferable treatment. Sterling will undoubtedly remain sensitive to the direction and pace of negotiations between the two sides which likely have a further 4-6 weeks to run.
