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Dollar bounces back on economic optimism, higher yields
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11 November 2019
Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.
Better-than-expected economic news and positive signs from the US-China trade conflict were the catalysts for another week of rising asset prices and risk-seeking investment flows.
Spotlight this week shifts to macroeconomic data again. UK GDP growth on Tuesday and US inflation on Wednesday are the main data points, though headlines from the US-China trade front will remain a source of volatility.
GBP
The Bank of England delivered somewhat of a dovish surprise last week. There were two unexpected dissenters from the decision to keep rates steady, both of whom had argued for a cut. Sterling suffered in the aftermath, finishing the week down over 1% against the dollar.
This week we will get a much clearer picture of the impact Brexit uncertainty has had on the UK economy. Third-quarter GDP growth should be supported by temporary factors, but employment data will give a clearer picture of the health of the economy.
EUR
A positive surprise on the final release of the October PMIs of business activity has not got the attention we believe it deserves. The composite index was revised up 0.4 points and is now well clear of the critical level of 50 that separates recession from growth.
This week there is some interest in finding out whether the German economy avoided a contraction in the third quarter. At any rate, it should be a week of light news out of the Eurozone, so the euro will trade mostly off of events elsewhere.
USD
Second-tier data out of the US last week came out on the stronger side, led by the ISM index of business sentiment. The sell-off that we saw in US government bonds seemed out of proportion with either the strength of the news or the mild progress seen in the US-China trade talks. The US 10-year treasury yield is now approaching the psychological level of 2% and, for now, that is providing support to the US dollar.
We now look to Fed Chair Powell’s testimony before the congressional Joint Economic Conference on Wednesday, where he may clarify whether the Fed is on hold for the foreseeable future as was suggested at the last FOMC meeting.
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