The US Dollar Gathers Strength on Powell's Hawkish Remarks
What’s been happening?
Pound Sterling – UK Markets
The pound sterling struggled to stand its ground against the dollar while recording modest gains vs the euro on Wednesday. The IHS Markit’s Services PMI (final) in September came in at 53.9 in the UK to miss the market expectation of 54. Commenting on the data, “Brexit worries continue to dominate the outlook, however, keeping business optimism firmly anchored at levels which would normally be indicative of an imminent slowdown. Clarity on Brexit arrangements is therefore needed as soon as possible to help sustain growth,” Chris Williamson, Chief Business Economist at IHS Markit, said.
In her highly-anticipated speech on the final day of the Conservatives Party annual conference, British Prime Minister said that Britain was not afraid of leaving the EU without a deal and added that ruling out a no deal outcome would weaken the UK’s negotiating position. Earlier in the day, British Cabinet Office Minister Lidington announced that they would be bringing forward more detailed proposals on the Northern Irish backstop very soon.
US Dollar – US Markets
The monthly report published by the ADP on Wednesday revealed that the private sector employment increased by 230,000 jobs from August to September compared to analysts’ estimate of 185,000. “The job market continues to power forward. Employment gains are broad-based across industries and company sizes. At the current pace of job creation, unemployment will fall into the low 3%’s by this time next year,” noted Mark Zandi, chief economist of Moody’s Analytics.
Other data from the U.S. showed that the business activity in the non-manufacturing sector continued to expand at a healthy pace in September with PMI readings of both the ISM and the IHS Markit surpassing the experts’ forecasts. “The non-manufacturing sector has had two consecutive months of strong growth since the ‘cooling off’ in July. Overall, respondents remain positive about business conditions and the current and future economy. Concerns remain about capacity, logistics and the uncertainty with global trade.” the ISM said in its publication.
Later in the day, while speaking to reporters at The Atlantic Festival in Washington, Jerome Powell, Chair of the Board of Governors of the Federal Reserve System, argued that the Fed could continue to raise rates even after they reach the so-called neutral rate. “We may go past neutral, but we’re a long way from neutral at this point," Powell said and added that the U.S. was experiencing “remarkably positive set of economic circumstances. Boosted by these hawkish remarks and the day’s robust data, the 10-year U.S. Treasury Bond Yield surged to its highest level in more than seven years and the US Dollar Index, which tracks the greenback against a basket of six major currencies, rose to a fresh six-week high above 96.
Euro – European Markets
According to the Eurostat, retail sales in the euro area declined 0.2% on a monthly basis in August following July’s 0.6% contraction and disappointed market participants who were expecting an increase of 0.2%. Other data on Wednesday showed that the output growth in the service sector advanced to its highest level in eight months in September with the IHS Markit PMI rising to 55.9 from 55 in August. However, this reading fell short of the market consensus of 56.5.“For the first time in almost two years, the service sector grew at a faster rate than manufacturing, confirming a fundamental shift in the growth drivers of the euro area’s largest economy,” Phil Smith, Principal Economist at IHS Markit, said and added: “Exports had been a key factor behind growth throughout the two years prior to the recent cooling in global trade flows, but now domestic demand is picking up the slack and has become the principal driver of expansion.” In the meantime, the Services PMI for the eurozone stayed unchanged at 54.7 to match market estimates.
On Italy-related headlines, the Italian government on Wednesday approved the budget deficit target of 2.4% of GDP in 2019, 2.1% in 2020 and 1.8% in 2021. Responding to this development, “Italy deficit at 2.4% risks breaking the EU rules,” the EU's Economics Commissioner Pierre Moscovici said. The shared currency struggled to find demand for the sixth straight day on Wednesday extended its losses vs the dollar and the pound sterling.
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK on Thursday and markets will focus on Brexit headlines.
US: Weekly jobless claims, factory orders, and Challenger Job Cuts will be featured in the U.S. economic docket.
EU: Benoît Cœuré, member of the Executive Board of the European Central Bank (ECB), is scheduled to deliver a speech on Thursday.