The US Dollar Weakens Sharply on Yield Curve Inversion Fears
What’s been happening?
Pound Sterling – UK Markets
The British pound rose against the dollar on Thursday but continued to weaken vs the euro, suggesting that investors who stay away from the dollar see the shared currency as a better investment alternative than the sterling. Today’s data published by the UK’s Office for National Statistics showed that retail sales rose 1.4% increased by 1.4% on a monthly basis in November following October’s 0.4% contraction and beat the analysts’ estimate for a 0.3% growth. Furthermore, the annual sales increase came in at 3.6% in the same period. However, the market reaction to the upbeat data stayed relatively muted ahead of the Bank of England’s announcements.
As expected, the BoE left its policy rate unchanged at 0.75% and kept the asset purchase facility steady at €435 billion. In its policy statement, the bank noted that Brexit uncertainties had intensified considerably since the last meeting and the sterling volatility had risen substantially. “The appropriate path of monetary policy will depend on the balance of the effects on demand, supply and the exchange rate. The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction,” the BoE said.
On Brexit-related developments, House of Commons leader, Andrea Leadsom, announced that the parliament will begin debate on Prime Minister May’s Brexit deal on January 9 and added that a meaningful vote was expected on January 21.
US Dollar – US Markets
Although the initial market reaction to FOMC Chairman Powell’s hawkish comments helped the dollar gather strength yesterday, the currency came under heavy selling pressure on Thursday as the falling Treasury bond yields revived concerns over a yield curve inversion, which is seen as an early indicator of a recession. The US Dollar Index, which measures the dollar’s value against a basket of six major rival currencies, fell to its lowest level since early November to reflect the currency’s broad-based weakness.
The data published by the Federal Reserve Bank of Philadelphia revealed that the business activity in the regional manufacturing sector expanded at a slower pace than expected in December with the headline diffusion index of the Manufacturing Survey coming in at 9.4 vs experts’ forecast of 15. On the other hand, the Conference Board Leading Economic Index improved to 111.8 in November following October 0.3% decline. Commenting on the data, “Despite the recent volatility in stock prices, the strengths among the leading indicators have been widespread. Solid GDP growth at about 2.8 percent should continue in early 2019, but the LEI suggests the economy is likely to moderate further in the second half of 2019,” said Ataman Ozyildirim, Director of Economic Research at The Conference Board.
Later in the day, former New York Fed President William Dudley defended FOMC’s policy decisions by saying that there wasn’t much evidence suggesting that the monetary policy was too tight. “If the economy starts to weaken then the Fed would definitely pause,” Dudley added but these comments failed to help the dollar recover its losses.
Euro – European Markets
The shared currency outperformed its rivals on Thursday and advanced to its highest level against the dollar in nearly six weeks. Although there were no fundamental drivers from the euro area that fueled today’s rally, the euro took advantage of the weakening market interest for the dollar and the British pound. The only data published by the European Central Bank showed that the current account surplus (seasonally adjusted) rose to €23 billion in October from €17.6 billion in September.
What’s coming up?
UK: The UK’s Office for National Statistics will release third-quarter GDP readings on Friday. Markets expect the economy to expand by 0.6% and 1.5% on a quarterly and yearly basis, respectively.
US: The U.S. Bureau of Economic Analysis will publish the (final) Q3 GDP data, which is expected to come in at 3.5% on an annual basis. Other data from the U.S. will include durable good orders and the University of Michigan’s consumer confidence index.
EU: The European economic docket will feature consumer confidence reports for the eurozone and Germany on Friday.