The US Dollar Weakens Amid Market Correction Ahead of Key Data
What’s been happening?
Pound Sterling – UK Markets
The pound sterling recovered a small portion of the losses it suffered against the dollar in the past week on Tuesday. However, the currency continued to weaken vs the euro, suggesting that the rebound witnessed in the GBP/USD was fueled by the dollar’s weakness.
Updating the Parliament on Brexit talks, British Prime Minister Theresa May said that they were still looking for alternatives to the Irish backstop and stated that they needed more time to complete the process of talks with the EU. “I believe we can reach a deal that the Parliament can support,” May said and announced that there won’t be a meaningful vote this week and that she will be making another statement on February 26.
Later in the day, speaking at the Financial Times event in Frobisher Hall, Bank of England Governor Mark Carney told the audience that it was in interests of everyone that a Brexit solution that works for both sides is found in the weeks ahead. “Trade tensions abroad and Brexit debates at home are manifestations of fundamental pressures to reorder globalisation,” Carney added while pointing out that the global economic policy uncertainty was at record highs.
US Dollar – US Markets
The US Dollar Index snapped its 8-day winning streak on Tuesday and retraced yesterday’s rally to reflect a broad-based selling pressure surrounding the currency. The only data from the U.S. on Tuesday showed that the NFIB’s Small Business Optimism Index dropped to its lowest level since 2016 at 101.2 in January from 104.4 in December and fell short of the market expectation of 103.2. “Business operations are still very strong, but small business owners’ expectations about the future are shaky,” noted NFIB President and CEO Juanita D. Duggan in the publication. “One thing small businesses make clear to us is their dislike for uncertainty, and while they are continuing to create jobs and increase compensation at a frenetic pace, the political climate is affecting how they view the future.”
More importantly, today’s price action suggested that investors took the opportunity to book their profits ahead of this week’s critical inflation and retail sales data from the U.S. Although FOMC Chairman Powell in a speech argued that the probability of a recession in the U.S. was “not at all elevated” and the national-level data level pointed out to a strong economy, these remarks failed to help the dollar find demand. Finally, U.S. President Donald Trump said that he could consider extending the March 1 deadline if there were moving closer to a trade deal with China.
Euro – European Markets
The shared currency posted strong gains against the dollar and rose vs the British pound for the third straight day on Tuesday. Speaking at the EcoFin meeting, the European Central Bank (ECB) Governing Council member and newly appointed Chief Economist Philip Lane said that Europe’s ‘domestic engine’ was still pretty strong and stated that the ECB was taking a measured approach on the incoming data. On a similar note, Governing Council member Nowotny reiterated that the bank would look at the decision about the rates in the summer.
What’s coming up?
UK: The UK’s Office for National Statistics will publish its inflation report, which will include the Consumer Price Index, Producer Price Index and Retail Price Index. Markets expect the core CPI to stay unchanged at 1.9% on a yearly basis in January.
US: The U.S. Bureau of Labor Statistics will release the inflation data. Analysts see the annual core CPI ticking down to 2.1% in January. Atlanta Fed President Bostic and Cleveland Fed President Mester are scheduled to speak on Wednesday as well.
EU: December industrial production data will be featured in the European economic calendar on Wednesday.