US Dollar dips ahead of this week’s Fed meeting
27/Oct/2015 • Currency Updates•
Last week’s strong US Dollar rally eased yesterday, with the Greenback suffering moderate losses against most of the currency’s major counterparts, including both Sterling and the Euro.
Disappointing housing data and expectations for no hike at tomorrow’s Federal Open Market Committee meeting were to blame, with the Dollar falling from its two-and-a-half month peak.
The end of this rally has forced businesses to decide on how much risk they are looking to take on the USD. The general market consensus seems torn on the future of the Dollar, and has therefore demanded closer attention to risk mitigation.
While the Fed is likely to keep rates unchanged tomorrow evening, currency traders will be looking out for the accompanying monetary policy statement, which could open the door to a rate hike in December.
We believe this would provide strong support for the USD this week. One thing is for sure – the increase in volatility for USD around this statement release.
Attention today will be mostly on data out of the UK and US economies. Any revision of UK economic growth for the third quarter this morning could cause Sterling volatility. Durable goods orders and consumer confidence in the US will also be worth noting. Both data points are likely to be looked at closely by the Fed before the Committee makes any monetary policy decisions.
Major currencies in detail
After trading within a narrow band for most of the day, Sterling rallied somewhat yesterday afternoon to finish 0.15% higher against the US Dollar, following some relatively disappointing economic data across the pond.
The little data released in the UK yesterday was mostly underwhelming. Mortgage approvals, although a second-tier and generally volatile data point, declined in September, showing possible renewed weakness in the UK housing market. Approvals fell by just over 2,000 to 44,489.
The CBI industrial trends survey also painted a gloomy picture of the manufacturing sector by declining to a reading of -18, its lowest since mid-2013.
Elsewhere, the latest poll from Reuters showed that most economists now expect the Bank of England to hike in the second quarter of next year, as is our forecast. 60% of those surveyed now expects a move between April and July, although there is little to suggest the Bank of England will increase before the Fed, with just 4 out of 43 economists expecting this to be the case.
The latest revision of economic growth in the UK is expected to remain unrevised on an annualised basis when released at 9.30am this morning, although any reading either side of this could move the Pound today.
There was a similar lack of volatility in the Euro yesterday, with the currency mostly unmoved against Sterling, although ending 0.1% higher versus the Greenback.
Yesterday’s lack of Euro movement came amid economic data mostly in line with consensus, with the German IFO confidence indices little moved for this month. The business climate index declined by 0.3 points to 108.2, albeit slightly better than forecast, with the expectations index moderately higher at 103.8 from 103.3 in September.
According to IFO, while Eurozone companies are slightly less satisfied with existing business conditions, the future outlook remains more favourable. This is even despite the ongoing Volkswagen scandal, which appears to have had little or no impact on the German automotive industry.
Today looks set to be a relatively light day in terms of economic data in the Eurozone, with money supply and private loans figures this morning a non-event.
The US Dollar dipped against its major peers yesterday, with the US Dollar index ending the London session 0.1% lower.
The Dollar’s decline yesterday was fuelled by weak housing data, after new home sales declined by 11.5% in the month to September. Sales of new family homes, seen as a leading indicator of US housing market strength, fell to a near one year low 468,000 units.
Worryingly, data for August was also revised downwards, suggesting that the housing market, which has been a bright spark for the US economy of late, may not be a strong as some economists have been suggesting.
In other news, there was further disappointments for the US manufacturing sector after the Dallas Fed manufacturing index printed negative again at an unfavourable -12.7, its tenth straight reading less than zero.
Rest of the world
The Polish Zloty weakened against the Euro yesterday following the majority election win for the challenging Law and Justice Party at Sunday’s parliamentary election. The result marked the largest winning margin, in terms of seats gained, for a single party in the country since 1989.
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