Hawkish Fed, impressive data send Dollar index to six week high

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6 October 2017

thomasdodds

The US Dollar index jumped to its strongest position in six weeks on Thursday ahead of the release of this afternoon all-important nonfarm payrolls report.

R
enewed optimism over the state of the US economy provided good support for the Dollar yesterday, which ended trading higher against almost every major currency. Traders have grown increasingly confident that the Federal Reserve should have enough ammunition to warrant raising interest rates at its December meeting following a bumper few days of economic data. Yesterday’s trade balance data didn’t disappoint with the deficit narrowing more than expected in August. A rise in exports and a decline in imports allowed the US to post it’s lowest deficit so far this year. Thursday’s initial jobless claims also beat expectations, falling to 260k versus 265k consensus.

FOMC members John Williams and Patrick Harker both acknowledged the recent improvement in economic conditions during their respective speeches yesterday. The two rate setters both claimed that one more interest rate hike this year and three next year was appropriate, a much faster pace than the market is currently pricing in.

Financial markets are now placing a near 80% chance of a Fed hike before the end of the year ahead of today’s US labour report. Consensus is for a job creation number of 90,000 which while fairly underwhelming, is likely to be largely attributed to recent adverse weather. The unemployment and average earnings growth data should therefore take on added importance when released at 13:30 UK time.

Sterling tumbles, ECB cautious on stimulus withdrawal

The Pound slumped to its weakest position against the Dollar in a month this morning, extending its losses below the 1.31 mark.

Theresa May’s eventful and fairly underwhelming speech at the Conservative Party conference on Wednesday continued to raise serious concerns over her future as Prime Minister. A report out of the Telegraph even suggested that up to 30 Tory members of parliament are prepared to sign a letter calling for her resignation after her peers were seemingly unimpressed by her keynote speech. The currency had sank below the 1.32 mark versus the broadly stronger greenback as London trading opened yesterday, before making another charge through the 1.31 level during Asian trading this morning.

The European Central Bank provided little assistance to the Euro yesterday, with policymakers voicing caution over the removal of its economic stimulus measures in the latest set of minutes. They emphasised the need to remain ‘patient, persistent and prudent’ while voicing concern over recent strength of the Euro. The minutes did, however, acknowledge improved confidence towards both growth and inflation and left open the possibility of an announcement on a reduction in the monthly asset purchases at this month’s meeting in less than three weeks’ time.

With no meaningful economic releases in both the UK and Eurozone today, the major currencies will likely be driven largely by this afternoon’s nonfarm payrolls report in the US.