US Dollar Under Pressure
What’s been happening?
Pound Sterling – UK Markets
The British pound recovered a small portion of its losses against the dollar on Monday and stayed virtually unchanged vs the euro. Speaking to reporters on Monday, British Brexit Secretary Greg Clark said it was important to have a Brexit deal to end the uncertainty in the economy and argued that a second referendum would prolong that uncertainty. “The Brexit deal proposed by PM May is still the best way to leave the EU, alternatives to Brexit deal are not without their problems,” Clark added. Earlier in the day, Trade Secretary Liam Fox told BBC’s Andrew Marr that he was expecting a deal to get finalised sometime in the new year. “The prime minister is giving an update tomorrow, she will be talking to the cabinet on Tuesday,” Fox said. Reaffirming these comments, PM May’s spokesman said that the Parliament vote on Brexit would take place in January.
While speaking in the House of Commons later in the evening, PM May announced that they were planning to hold the vote in the third week of January and explained that the EU leaders were clear that they did not want to use the backstop.
Meanwhile, in its Household Finance report, the IHS Markit revealed that the UK households’ assessment of current finances fell to its lowest level since June in December. Commenting on the publication, “The underlying message from the December HFI survey is downbeat. Current finances are deteriorating, living costs are rising at a stronger rate and, excluding data immediately after the EU referendum, households are the least confident towards the outlook for property prices in six years,” said Joe Hayes, Economist at IHS Markit.
US Dollar – US Markets
After touching its highest level in nearly 18 months on Friday, the US Dollar Index, which gauges the greenback’s value against a basket of six major currencies, lost its traction on Monday as investors started to reposition themselves ahead of Wednesday’s critical FOMC meeting. The monthly report published by the Federal Reserve Bank of New York on Monday showed that the business activity in the NY area’s manufacturing sector expanded at a slower pace in December than it did in November. “The headline general business conditions index fell twelve points to 10.9,” the New York Fed said in its publication. “Looking ahead, firms remained fairly optimistic about the six-month outlook, though optimism was slightly more tempered than in November.” Moreover, a more than 1% fall witnessed in the 10-year Treasury bond yields put some extra weight on the dollar’s shoulders.
In an interview with CNBC on Monday, White House trade adviser Peter Navarro argued that the economy was growing without inflation and that the Fed shouldn’t hike the policy rate on Wednesday. Navarro further added that the Fed was responsible for the recent market volatility and that the bank needed to watch the data carefully.
Euro – European Markets
The shared currency took advantage of the dollar’s weakness on Monday but failed to record any meaningful gains vs the pound sterling. The data released by the Eurostat on Monday showed that the inflation, as measured by the Consumer Price Index (CPI), ticked down to 2% on a yearly basis in November to fall short of the market expectation of 2%. The core CPI, which excludes volatile food and energy prices, came in at -0.3% on a monthly basis and stayed unchanged at 1% annually. Other data revealed that the trade surplus (seasonally adjusted) narrowed to €12.5 billion in October from €13.4 billion in September.
While delivering his remarks in a news conference, incoming ECB member Pierre Wunsch, who will replace Jan Smets as Belgian central bank Governor in January 2019 and also sit on the ECB's governing council, argued that the ECB could delay rate hikes if the economy were to slow more than expected and explained that the decision on policy rate would depend on the incoming data. "After the end of QE... the focus will shift to our interest rate policy and this will be dependent on what we see in the economy," Wunsch said.
What’s coming up?
UK: Investors are likely to stay focused on the political headlines amid a lack of macroeconomic data releases from the UK.
US: Housing starts and building permits data will be featured in the U.S. economic docket on Tuesday.
EU: The CESifo Group will release the confidence report for Germany, which will include Expectations, Current Assessment, and Business Climate indexes.