The US Dollar Recovers as Fed Sees No Reason to Delay Next Hike
What’s been happening?
Pound Sterling – UK Markets
Earlier in the day, citing European Commission sources, the Austrian Der Standard newspaper reported that a Brexit deal could be reached in the coming days. However, while speaking to reporters, British Foreign Secretary Hunt stated that it was unlikely to reach a final agreement in the next seven days to limit the British pound’s potential gains against its rivals. Additionally, according to Yahoo News, a UK government source said that the recent news about a deal coming in in the next few days should be taken “with a very large pinch of salt.”
After recording decisive gains in the last three days, the British pound weakened against the dollar on contradicting Brexit headlines on Thursday. Although the currency rose to its highest level in more than six months vs the euro, this move reflected the shared currency’s poor performance rather than higher demand for the pound sterling.
US Dollar – US Markets
As widely anticipated, the FOMC decided to maintain the target range for the federal funds rate at 2 to 2.25% on Thursday. “Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate,” the FOMC said in its policy statement. “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective.”
Although the FOMC didn’t offer any fresh insights into the near-term policy outlook, the fact that it didn’t voice any concerns regarding the recent market volatility, the flattening yield curve, or the potential negative impacts of the Trump administration’s trade policy on the economy, suggested that it was comfortable with hiking the rate one more time in December. With the initial market reaction, the US Dollar Index, which measures the dollar’s value against a basket of six major currencies, rose to its highest level in a week.
Earlier in the day, the weekly data published by the U.S. Department of Labor showed that the advance figure for seasonally adjusted initial claims decreased to 214,000 in the week ending November 3.
Euro – European Markets
Commenting on the Italian budget crisis, the European Union's Economic Commissioner Pierre Moscovici said they wanted to ensure that the EU budget rules were expected and all Euro-zone finance ministers were supporting the Commission on Italy and wanted the dialogue to continue. In its monthly Economic Bulleting, the European Central Bank repeated that the euro area economy was still in a broad-based expansion and the short-term indicators pointed to continued strength in the labour market. Meanwhile, the data published by Germany’s Destatis showed that the trade surplus in the country declined to €17.6 billion in September from €18.2 billion in August and fell a little short of the market forecast of €18 billion. A 0.8% contraction seen in exports seemed to be the primary reason why the trade surplus shrunk in September.
Despite the ECB’s positive outlook, however, the European Commission announced that it lowered its 2019 growth forecast to 1.9% from 2% seen in the previous publication and said that mounting risks from Italy could impact the growth negatively. The EC further added that Italy’s deficit was expected to be 1.9% in 2018, 2.9% in 2019 and 3.1% in 2020.
What’s coming up?
UK: The UK’s Office for National Statistics (ONS) will publish the preliminary estimate of the real GDP growth in the third quarter, which is expected to improve to 1.5% on a yearly basis from 1.2% recorded in the second quarter. Furthermore, industrial/manufacturing production, total business investment, and trade balance data will be released as well.
US: Producer Price Index (PPI), the UoM Consumer Sentiment Index, and wholesale inventories will be featured in the U.S. economic docket on Friday.
EU: There won’t be any macroeconomic data releases from the euro area on Friday. Benoît Cœuré, a member of the ECB's Executive Board, will be delivering a speech later in the afternoon.