Wall Street's Collapse Weighs on Dollar
What’s been happening?
Pound Sterling – UK Markets
The pound sterling continued to gain value against both the euro and the dollar ın Wednesday. The data published by the UK’s Office for National Statistics on Wednesday showed that manufacturing production declined by 0.2% on a monthly basis in August while industrial production rose by 0.2% in the same period. A separate report revealed that the GDP didn’t grow in August following July’s 0.4% expansion and fell short of the market expectation for a 0.1% increase. Regarding the GDP figures, “The monthly growth rate for GDP is volatile and therefore it should be used with caution and alongside other measures, such as the three-month growth rate when looking for an indicator of the longer-term trend of the economy. However, it is useful in highlighting one-off changes that can be masked by three-month growth rates,” the ONS explained. Finally, the trade deficit in August increased to £1.274 billion from £572 million to miss the analysts estimate for a deficit of £1.150 billion.
Discussing the impact of wage inflation on the monetary policy, the BoE's chief economist Andy Haldane said that they were observing a limited and gradual rise in wage growth, which would underpin a similar increase in interest rates.
On Brexit-related headlines, citing European diplomats, Reuters claimed that the EU was no longer expecting a new proposal from the UK on post-Brexit Irish border solution and negotiators on both sides would look to reach an agreement in direct talks next week. In a separate article, Reuters reported that lenders were stepping up their contingency plans for the aftermath of a possible no-deal scenario and the BoE was planning to ask them for data on loans, funding, and derivatives every six hours. Later in the day, the EU’s chief Brexit negotiator, Michel Barnier, announced that a Brexit deal was within reach by next Wednesday, October 17th, and added that the UK was committed to respecting the integrity of the EU’s internal market including Ireland.
US Dollar – US Markets
The U.S. Bureau of Labor Statistics on Wednesday announced that the Producer Price Index (PPI) rose 0.2% in August after falling 0.1% in July and matched the analysts’ forecast. Meanwhile, the core PPI, which excludes volatile food and energy prices, increased 2.5% on a yearly basis. Regardless of this data, the US Dollar Index lost its traction and recorded losses for the second day in a row. Heavy losses witnessed in Wall Street weighed on the Treasury Bond yields and made it difficult for the USD to find demand. In an interview with the Financial Times, the U.S. Treasury Secretary Steven Mnuchin said that a trade deal with China wouldn’t be possible until they stopped making competitive devaluations of their currency to cause an escalation in geopolitical tensions. The Dow Jones Industrial Average and the S&P 500 closed the day around 3% lower while the Nasdaq Composite Index erased more than 4%.
In the meantime, while speaking at an event in Flint, Michigan, Chicago Fed President Charles Evans suggested that the Fed could stop after the raising the interest rate to ‘about 3%’ and repeated that the national economy was doing ‘extremely well.’
Euro – European Markets
According to the data released by Italy’s National Institute of Statistics, the industrial output fell 0.8% on an annual basis in August to better the market forecast for a 2% drop. Commenting on the risişng government bond yields, Italy's finance minister Giovanni Tria argued that the excessive yields gains were not a reflection of true economic fundamentals. Additionally, Italy's Deputy Prime Minister Matteo Salvini stated that he was ‘absolutely sure’ that the German-Italy 10-year bond spread wouldn’t reach 400 basis points.
Meanwhile, Yves Mersch, the European Central Bank board member, repeated that the eurozone economy was experiencing broad-based expansion and that they were expecting the wage growth to continue to support the core inflation.
On the other hand, citing a government document, Reuters reported that the German Economy Ministry lowered its 2018 economic growth forecast to 1.8% from 2.3% previously while cutting the 2019 GDP expansion estimate to 1.8% from 2.1%.
What’s coming up?
UK: The Bank of England will publish the findings of its Credit Conditions Survey and Governor Mark Carney, and the MPC member Gertjan Vlieghe will be delivering speeches.
US: The weekly initial jobless claims and CPI report will be featured in the U.S. economic docket on Thursday. Markets expect the annual core-CPI to tick up to 2.3% in September from 2.2% in August.
EU: The European Central Bank is scheduled to release the accounts of its September monetary policy meeting.