US Dollar sell-off continues on geopolitical tensions

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22 August 2017


The US Dollar remained on the back foot yesterday with geopolitical tensions and ongoing doubts over the path of Federal Reserve interest rate hikes heaping selling pressure back on the currency.

olitics continues to be a major driver for the Dollar at present and the news that Steve Bannon was dismissed from President Trump’s administration on Friday evening has further distracted from the generally positive economic news out of the world’s largest economy. In the absence of any pieces of meaningful economic data, geopolitical tensions in North Korea are continuing to lead to a sell-off in the greenback and an appreciation in the safe-havens. Kim Jong Un’s warning of a “merciless strike” following “reckless behaviour driving the situation into the uncontrollable phase of a nuclear war” has kept the market on edge. The Japanese Yen, in particular, has been a major benefactor, rising to just shy of its strongest position since late-April.

Investors are now gearing up for the Jackson Hole symposium on Thursday and Friday that will see Federal Reserve Chair Janet Yellen provide an update on the state of the US economy. Any rhetoric from Yellen that suggest the recent slowdown in inflation could prove temporary would likely bring forward expectations for the next interest rate hike in the US and support the Dollar. At present, financial markets are pricing in a mere 30% chance that the FOMC will raise rates again before the end of the year, a significant departure from the near 60% probability priced in a matter of weeks ago.

Euro hits near two week high ahead of Draghi appearance

The Euro broke back above the 1.18 level against the US Dollar on Monday to a near two week high. Yesterday’s near 80 pip move in EUR/USD was somewhat surprising given the lack of any major announcements and could be attributed to profit taking ahead of this week’s highly anticipated Jackson Hole meet.

President of the European Central Bank Mario Draghi will also be speaking at the Jackson Hole conference on Friday on the outlook for the Eurozone economy. Draghi will be wary of any potential market reaction to his comments and is not expected to add any new policy information. In the meantime, Wednesday’s preliminary business activity PMIs could present a major event risk to the common currency.

Mixed session for Sterling amid Brexit talks

Sterling had a mixed start to the week on Monday, edging higher against a broadly weaker Dollar but slipping to new lows against the Euro as weaker growth and uncertainty surrounding the ongoing Brexit discussions continued to weigh on the UK currency. With inflation declining in the month of July, investors are also beginning to completely rule out the possibility of a Bank of England interest rate hike in 2017, with markets pricing in a meagre 20% probability of a hike in December.

This week looks to be fairly barren in terms of economic data releases as the typically quiet August trading begins to near an end. Friday’s revised GDP numbers are expected to remain unchanged.