The US Dollar Gains Traction as Brexit Optimism Fades
What’s been happening?
Pound Sterling – UK Markets
The pound sterling gathered strength vs the dollar in the first half of the day but failed to preserve its momentum and finished modestly lower. Against the euro, the GBP stayed relatively unchanged throughout the day. With the EU27 endorsing the Brexit deal on Sunday, markets’ attention now turns to the meaningful vote, that is expected to take place on December 11. British Brexit Secretary Stephen Barclay on Monday told the reporters that it was going to be a tough task to get the deal past the Parliament and added that they would be in uncharted waters if the Parliament were to reject the deal. Meanwhile, the European side continues to remind that they are not open to a new round of negotiations if the Parliament doesn’t approve the deal.
According to Reuters, a senior EU official argued that their only ‘plan B’ was to prepare for a no-deal Brexit. “There is a common appreciation that what is on the table is the only possible deal given the positions of the United Kingdom,” the official said. “The only Plan B that is going on is preparedness planning. This work continues.” Nonetheless, the British pound was able to record modest gains against both the dollar and the euro on Monday. However, it’s unlikely for the currency to stage a decisive recovery ahead of the meaningful vote.
US Dollar – US Markets
The Federal Reserve Bank of Chicago’s National Activity (CFNAI) Index improved to 0.24 in October from 0.14 in September. “The CFNAI Diffusion Index, which is also a three-month moving average, increased to +0.32 in October from +0.24 in September. Fifty of the 85 individual indicators made positive contributions to the CFNAI in October, while 35 made negative contributions,” Chicago Fed said in its publication. Later in the day, the monthly report published by the Federal Reserve Bank of Dallas showed that the business activity in Texas’ manufacturing sector lost momentum in November with the headline general activity index slumping to 17.6 from 29.4. “The survey’s demand indicators—the new orders and growth rate of new orders indexes—declined to 9.7 and 4.8, respectively, representing their lowest readings in 20 months,” Dallas Fed noted. “Labor market measures suggested continued but slower employment growth and longer workweeks in November.”
Despite these mixed data, however, the greenback received a boost from the rising Treasury bond yields and the US Dollar Index rose to its highest level in ten days.
Euro – European Markets
The shared currency received a modest boost from Italy-related headlines and gathered strength against its peers despite disappointing macroeconomic data releases but finished the day flat vs both the dollar and the British pound. Citing an Italian government source, Reuters on Monday reported that Italy was looking to reduce the budget deficit target to 2% - 2.1% from 2.4% that is currently set in the 2019 budget proposal. Commenting on this report, Italian Deputy Prime Minister Matteo Salvini didn’t name any specific numbers but said that the government had positive feedback from the European Commission on lowering the deficit target.
In the meantime, while speaking at an event in Frankfurt, the European Central Bank’s Chief Economist Peter Praet repeated that the underlying inflation was expected to rise over the medium term and added that significant monetary stimulus was still needed. “Factors related to protectionism, financial market volatility and vulnerabilities in emerging markets are creating headwinds,” Praet stated. Moreover, while delivering his prepared statement at the ECON committee of the European Parliament, Mario Draghi, President of the ECB, said that the data that since September had been somewhat weaker than expected. “To ensure that inflation continues to move towards our aim in a sustained manner, a significant degree of monetary policy stimulus will be maintained, even after the end of net asset purchases,” Draghi added.
The data from Germany on Monday showed that the business confidence continued to deteriorate in November with the Ifo’s headline business climate index falling to 102 from 102.8 in October. Additionally, the expectations index dropped to 98.7 to miss the experts’ estimate of 99.2. Commenting on the report, Kalus Wohlrabe, an economist at Ifo, noted that there were signs that the German economy was clearly cooling. “Uncertainty has increased in all sectors of the economy due to Brexit and trade conflicts. There are increasing signs of possible German economic turnaround,” Wohlrabe concluded.
What’s coming up?
UK: The CBI Distributive Trades Survey (realized) will be the only data featured in the UK economic docket on Tuesday.
US: Housing price index, which is expected to rise 0.4% on a monthly basis in September, will be published in the U.S. Later in the day, the Fed’s new Vice Chairman Richard Clarida is scheduled to deliver a speech.
EU: Italy will release consumer confidence and business confidence data on Tuesday. Moreover, Destatis will announce import price index readings in Germany.