US Dollar plunges ahead of Bank of England ‘Super Thursday’
04/Feb/2016 • Currency Updates•
The US Dollar tanked against almost every major currency on Wednesday, including all other G10 currencies. It fell by over 1% against the Euro, Pound and Yen.
The main reasons were further weak economic data across the Pond and some dovish comments from Federal Reserve member William Dudley. This has strengthened the view that there may be a delay in the US Dollar’s expected rally and it could provide some relief and even a window of opportunity for UK businesses buying USD to pay suppliers around the world.
The Japanese Yen ended the day as the best performing major currency in the world, soaring by 1.9% against the Dollar during the London session after a further decline in stock markets in Europe spurred investors to again flock to the safe-haven Japanese currency.
This more than dampened the reaction following the Bank of Japan’s shock negative rate move last week, with the Yen having now recovered all of its losses sustained last Friday.
BoJ Governor Kuroda claimed yesterday that the central bank still has ample room to expand its stimulus measures further, including a deeper cut in the interest rate to meet its ambitious inflation target.
Sterling was given a boost by a welcome improvement in service sector growth ahead of today’s Bank of England ‘Super Thursday’. The UK central bank will, at midday, be releasing its interest rate decision, monetary policy minutes and quarterly Inflation report simultaneously. This could prove of key importance to UK businesses with exposure to the Pound, and remains one of the most significant announcements on the domestic economic calendar.
Investors are now very much expecting and pricing in an even more dovish tone from policymakers today amid the recent global financial turmoil. A cut in growth and inflation forecasts is likely, with Governor Carney’s press conference at 12:45pm expected to address slower than expected wage growth and the negative effect of falling oil prices on UK inflation expectations.
We expect the economic uncertainty we’ve seen recently to cause a fair degree of volatility in asset and currency prices in the short term, particularly with the deflationary pressure created by the economic headwinds from China and the drop in the price of oil rippling around the world. Some UK businesses with USD exposure are now locking in the price of their expected USD outflows over the medium term with financial instruments to insulate their business from any further economic volatility.
Major currencies in detail:
Sterling continued its recovery yesterday and clawed back around half of its losses against the USD since mid-December, having rallied by 1.2% yesterday.
The UK’s dominant service sector continued to grow strongly in January, according to figures released on Wednesday. The flash services PMI ticked up to 55.6 from 55.5 and remains consistent with growth of around 0.6% on a quarterly basis when combined with similar manufacturing and construction figures from earlier in the week.
Meanwhile, Prime Minister David Cameron began mounting a staunch defence of his EU reform deal in the House of Commons. The Pound has received modest support after a proposed deal on Britain’s membership in the European Union was presented on Tuesday.
A sharp drop in sentiment for the Dollar caused the Euro to soar by 1.3% yesterday.
Announcements in the Eurozone continue to be mostly overshadowed by events elsewhere. Economic data yesterday was fairly mixed, although it did little to prevent the Euro from soaring to its strongest position against the US Dollar since October.
Underwhelming service sector growth in Italy and France was offset by another strong performance in Spain, meaning the latest flash PMI remained unchanged at 53.6. Retail sales, however, remain weak, underlying a lack of consumer demand in the Euro-area. Sales in the month to December increased for the first time in four months, although only by 0.3%.
European Central Bank President Mario Draghi spoke this morning in Frankfurt, reiterating the risk of acting too late to boost ultra-low inflation.
More weak economic data and dovish comments from Fed member Dudley were enough to send the US Dollar index 1.4% lower on Wednesday.
Speaking in an interview with MNI in New York, FOMC member and New York Fed President William Dudley claimed that financial conditions were now ‘considerably tighter’ than at the time of the December monetary policy meeting.
Dudley suggested that a weaker global economy and a stronger US Dollar could have ‘significant consequences’ for the health of the US economy, and could possibly delay further interest rate hikes should they persist.
Economic data continues to remain weak. Growth in the non-manufacturing sector of the US economy slowed in January, far more than expected. ISM’s non-manufacturing PMI fell sharply to 53.5 from 55.3, fuelling further concerns of an overall slowdown in economic growth in the first quarter.
By contrast, the labour market continues to perform strongly, with private sector employment increasing impressively by 205,000 last month, according to ADP.
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