US Dollar continues to gain from bets on a 2015 rate hike
23/Sep/2015 • Currency Updates•
The US Dollar extended its run of gains against both the Euro and the Pound yesterday, nearing a two week high against the single currency as traders continue to bet that the Federal Reserve will hike interest rates in the US, while the European Central Bank is set to ease further. This comes after hawkish words on Monday from Fed members that suggested interest rates may go up in 2015 in the US, as is our long standing expectation.
In the global economy today, Mario Draghi will be speaking at a hearing before the Committee on Economic and Monetary Affairs (ECON) in Brussels at 3pm. Traders will be looking to gain an insight regarding the possible expansion of the ECB’s quantitative easing programme. Any firm hint from Draghi will likely send the Euro lower today.
Sterling declined sharply against a strong Dollar yesterday, down by 0.8% during the London session, with all its gains from last week now completely wiped out.
According to the ONS, government borrowing edged higher in August, increasing slightly from a year previous. Public sector net borrowing, excluding banks, rose to £12.1bn last month, above most analysts’ expectations and around £1.4bn greater than this time twelve months ago. In other news, the monthly CBI survey showed that stagnant manufacturing remains a challenge for the UK economy, with output stalling for the first time in two-and-a-half years in September due to a stronger Pound.
Meanwhile, Chancellor of the Exchequer George Osborne chipped into the interest rate debate, by claiming that rates in the UK are more likely to go up than down. Speaking to the BBC, Osborne suggested “robust growth” in Britain means that an exit from very loose monetary policy is on the horizon.
No major announcements in the UK economy today means that Sterling will largely be driven by events elsewhere, primarily in the Eurozone.
The single currency continued to lose ground against the US Dollar yesterday, depreciating by 0.4%. The Euro did, however, post a moderate 0.35% increase against Sterling.
Traders and analysts alike drove the Euro lower ahead of today’s speech by ECB President Mario Draghi, continuing to expect the central bank to increase its asset purchasing programme before year-end.
We also had some disappointing data in the Eurozone yesterday, after consumer confidence continued to dip further from its recent multi-year high. Confidence in the Euro-area fell to -7.1 this month from the -6.9 reading registered a month previous. Heightened concerns over the global economy, especially given the recent slowdown in China, are likely to have weighed on the minds of consumers. While disappointing, it remains impressive compared to long-term norms, with the fundamentals pointing to a hold up in reasonably strong consumer spending.
Along with Draghi’s speech, the latest flash services and manufacturing PMI’s this morning could also cause moderate volatility in the Euro today.
The US Dollar continued to appreciate verses its peers yesterday, up by 0.5% in a trade-weighted basis. Three-quarters of economists polled by Reuters now expect the Fed to hike interest rates in December, with over 50% suggesting the Fed was wrong not to hike last week.
In terms of economic data yesterday, manufacturing in the US economy continues to show a moderate slowdown. The latest Richmond Fed manufacturing index turned negative in September, showing a greater than expected decrease in activity this month. The index decreased to a reading of -5, after having printed flat last month, with readings below zero representing contraction.
Elsewhere, US house prices increased by 0.6% in July, moderately above forecasts, according to the Federal Housing Finance Agency. The increase was the highest since May, and points to an encouraging uptick in housing activity.
Manufacturing growth at 2.45pm will be the major release in the US today.
Rest of the world
The Turkish central bank left its benchmark interest rate unchanged today, despite the recent significant weakening of the Lira. The central bank claimed that it would stick with its cautious monetary policy stance until the inflation outlook improves significantly.