US Dollar soars against its major peers despite move into deflation

Enrique Díaz-Álvarez27/Feb/2015Currency Updates

GBP

A mixed day for Sterling saw the Pound climb by 0.5% on the Euro but finish 0.8% lower on a strengthening Dollar.

Economic growth in the UK was confirmed at 0.5% in the fourth quarter by the Office for National Statistics on Thursday morning. The figure was unrevised from the initial estimate, with the UK economy growing by 2.7% year-on-year in January, confirming its status as the fastest growing economy in the G7 in 2014. Business investment fell for the second consecutive quarter in Q4 last year. Spending by business was down by 1.4% after a sharp reduction in investment by oil companies in Britain. However, on an annualised basis investment still managed to climb by 2.1%.

No major data releases in Britain today. Consumer confidence from the GfK Group will be released before markets open.

EUR

The single currency plunged versus the greenback on Thursday by a massive 1.3%, its greatest daily fall in five weeks.

However, unemployment in Germany impressed, dropping twice as much as forecast on Thursday morning. A surge in demand for labour caused the number of people out of work to decline by 20,000 in January to a seasonally adjusted 2.81 million. Encouragingly for Europe’s largest economy, this marked the fourth consecutive month unemployment had fallen in absolute levels. The rate of unemployment remained stable at 6.5%. On another positive note, consumer confidence in the country rose to its highest level since late 2001. Rising income expectations and a boost in economic optimism caused the consumer confidence survey to soar above expectations to 9.7 in January from a reading of 9.3 registered a month previous.

Revised inflation for Germany out at 1pm this afternoon is the highlight of an otherwise quiet end to the week for the Eurozone.

USD

The Dollar soared throughout London trading yesterday after better than expected core inflation and strong durable goods orders. The US Dollar index finished marginally shy of an eleven year high having climbed by 1.1%.

As expected, the US economy dipped into deflation in January for the first time since the financial crisis. Driven down by the persistently low global oil prices, which caused domestic gasoline to plunge 18.7% in January, price growth fell by 0.1% in the world largest economy to mark the greatest monthly drop since November 2008. The consumer price index was down by 0.7% month on month. While deflation in the US is expected to be temporary, it may raise a dilemma for the Federal Reserve as it approaches its first interest rate hike since 2006. However, crucially for the central bank, the level of core inflation remained strong at 1.6% having risen by 0.2% in January.

Elsewhere in the US, orders for durable goods rose for the first time in three months in January. An increase in demand for machinery and computers contributed to overall orders climbing by 2.8%, the highest monthly increase since orders spiked in July last year. This was significantly higher than the 1.7% growth markets were expecting. Durable goods orders excluding transportation was up by 0.3% for the same month. Initial jobless claims jumped last week by 31,000 to 313,000, although importantly, the four week moving average remained strong at 294,500. Continuing claims for the week previous were worse than forecast, although printed lower at just over 2.4 million.

Economic growth figures from the US Bureau of Economic Analysis, out at 1.30pm GMT today, headlines a string of releases across the pond this afternoon.

Rest of the world

Consumer prices in Canada slumped to its lowest in more than a year in January while the Ukrainian Hryvnia plunged to a new record low after the central bank abruptly reversed a far-reaching ban on foreign currency purchases.

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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.