Post date: 14/01/2019 08:00
Neither the strong data out of the US nor the considerably weaker numbers out of the Eurozone were sufficient to pull the dollar out of its dive last week. The greenback fell against every other G10 currency. Top of the table were the commodity currencies, the Norwegian kroner and the Australian, New Zealand and Canadian dollars, buoyed by the very strong start of the year in commodity prices. Dovish commentary from the Federal Reserve seems to have removed much of the end-of-year gloom from financial markets and investors are busy snapping risk assets, which for now is being used as an excuse to sell the US dollar.
The second week of the month is traditionally short on market moving data, and no critical central bank meetings are held. Politics will be front and centre in FX markets. The US Federal Government shutdown and Parliament vote on the withdrawal agreement will be the focus for traders.
The UK Government recent defeats in parliament are actually good news for Sterling, as they reduce notably the chances of a disastrous no-deal outcome. Comments by both Theresa May and Jeremy Corbyn over the weekend rejecting the possibility of such an outcome lead us to believe that a postponement of the March 29th deadline is quickly becoming the central scenario. The House of Commons votes on the agreement on Tuesday and is almost certain to be rejected by a heavy majority. This is fully priced in by markets and the keys to Sterling reaction will be the political reaction in the immediate aftermath of the vote.
Macroeconomic data out of the Eurozone continue to surprise to the downside. Disappointment in November industrial production could perhaps be attributed to automotive factories tooling up for the change in emission standards, but absent a January rebound in the key PMI indices, commentary out of ECB officials should turn markedly more dovish in the coming weeks. In view of this negative data, recent Euro strength is notable. We wonder if this strength is at least partly the result of signs of institutional degradation in the US under the Trump administration, most notably the US government shutdown and the apparent lack of concern over its consequences.
After recent dovish Federal Reserve comments, markets are pricing in just a 20% chance of a single hike in 2019. Partly this reflects increasing concern aver the US Federal government shutdown, which goes now into an unprecedented fourth week. This is a sign of severe institutional weakness in the US. Further, it means that key macroeconomic data releases will not be published at all, which adds to the uncertainty and the general negativity around the US dollar. In the absence of a resolution to the impasse, we expect the US dollar to continue its recent downward drift, particularly if we see any sign of a rebound in Eurozone data.