Post date: 03/12/2018 08:00
The clearest indication yet that the Federal Reserve is considering a pause in its rate hiking cycle brought down interest rates across the curve in the US. However, the dollar took this development remarkably well, even as risk assets worldwide celebrated the news with rallies in equity and credit markets. A possible explanation for the dollar’s relatively solid performance in spite of falling Treasury yields may be the disappointing news from elsewhere, in particular the soft inflation readings from the Eurozone.
Next week the focus will shift back to economic releases. As usual, the monthly US payroll report out Friday afternoon will be key. We also will be paying close attention to second tier Eurozone releases, looking for clues about recent slowdown in aggregate data. The Brexit debate in the UK Parliament should also provide plenty of volatility for Sterling.
All economic data continue to be ignored in the UK as the Brexit debate is the only thing that drives the Pound. The EU agreed to the draft agreement, but the Pound did not benefit as all depends now on getting it through parliament. The vote is scheduled for December 11th, but we expect the tally of yes and no’s to start this week and drive again most of the action on the Pound.
Eurozone economic news continued their disappointing streak last week. Core inflation pulled back from 1.1% to 1.0%, showing no sign of establishing a trend towards the ECB target of close to, but below 2%. Right now, this critical indicator continues to be stuck in the low range of the last seven years. We now think that our timetable for ECB hikes in the third quarter of 2019 is too ambitious and will be revising this in the near future. The Euro didn’t suffer as much as may have been expected from this continuation of the soft data of the past few weeks, since the Federal Reserve also took a dovish turns in its communications last week.
Few macroeconomic releases of note meant the spotlight last week was on Federal Reserve communications. Speeches from Chair Powell and Richard Clarida, as well as the minutes of the last Fed meeting, suggest that Fed officials think rates are not far from neutral levels. While a December hike is almost guaranteed, markets now expect no more than one for the entire year of 2019. We think this is a realistic assessment, as there are no inflationary pressures to be seen in the US and the Fed can now afford to sit back and wait for further data before taking action. As a result, we think there is room for the US dollar to unwind some of the gains it has notched up since September.