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Dollar bounce back as Trump ends fiscal stimulus talks

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7 October 2020

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Investors appetite for risk made a sharp U-turn yesterday evening after President Trump quashed hopes of more US fiscal stimulus before the election.

A
s we noted yesterday, risk assets were buoyed on Monday by optimism surrounding the possibility of more spending from the US government designed to support the economy from the impact of the pandemic. In a surprise move, President Trump instead cancelled discussions with the Democrats until after the election on 3rd November. This ensures that millions of unemployed Americans will not receive additional financial support from the government until December at the very earliest. Monday’s FX flows were quickly reversed on the news, with investors fleeing to the safe-haven US dollar and selling almost every other currency in the G10.

This week sees a number of Federal Reserve member speeches. FOMC chair Powell spoke yesterday, reiterating that rates will be held low for a prolonged period of time. Members Mester and Bullard also made public appearances, stating their view that the next policy move should be to lengthen the maturity of bond purchases, rather than touch interest rates. The Fed will be in focus again this evening, with the FOMC minutes set for release at 19:00 BST. We expect the minutes to adopt a dovish tilt, specifically noting the risks of low inflation.

German factory orders jump more than expected in August

The euro ended trading on Tuesday roughly where it had begun the week, erasing all of its gains following Trump’s announcement.

The common currency had received a bit of support from Tuesday’s strong Germany factory orders data. Factory output jumped by a larger-than-expected 4.5% in August, with a notable upward revision to the previous month. This morning’s German industrial production numbers were slightly less encouraging, showing an unexpected month-on-month decrease in activity in August. The general feeling towards the Euro Area economy is, however, still a relatively positive one following last week’s robust retail sales and PMI numbers. It will be interesting to see whether this trend continues in upcoming data, or if the second wave of infection evident in much of the bloc is having a material impact on economic activity.

German trade data out tomorrow may receive some attention, as will the ECB’s latest meeting accounts.

Pound edges higher as Brexit talks continue

Sterling briefly sold-off below the 1.29 level yesterday, although the currency is back trading above it at the time of writing.

Investors remain somewhat cautious on the pound, given the importance of this week’s Brexit discussions. Most of the headlines from the more reputable news outlets have been largely positive in the past few days, with the market increasingly coming around to the view that a deal could be in the offing around early-November time. It has been suggested that both parties are now close to an agreement on social security rights. This would be a big step in the right direction, given it has been one of the key sticking points in discussions in the past few months.

Aside from ongoing Brexit headlines, investors will be paying close attention to a speech from BoE governor Bailey this afternoon, with the market keen to hear his latest thoughts on the possibility of negative UK interest rates.

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