Currency Note

Dollar claws back some recent losses as Trump sits on the fence

By Paul Redmond August 15th, 2017

Dollar claws back

The big news from over the weekend was the terror attack in Charlottesville, Virginia. Tragically, Heather Heyer was killed when a car rammed into a group of peaceful protesters at an anti-racism rally. Donald Trump’s failure to explicitly condemn the attack immediately was widely criticised by both Republicans and Democrats. He has now released a statement but for many it is seen as too late. Not many US Presidents would be able to make their threat to attack North Korea a secondary headline.

Meanwhile, data from the eurozone showed that industrial production fell by 0.6% in June which was slightly worse than the predicted 0.5% decline. However, on an annualised basis it has still grown by 2.6%. The UK is set to lose its status as the world’s fifth biggest economy, as sterling weakness against the euro has relegated us behind France into sixth.

Tomorrow we have key earnings data out of the UK and the release of the minutes from the last Federal Reserve meeting which will be very carefully scrutinised as there is widespread debate on whether or not they will increase interest rates again this year.

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GBP: will inflation put the UK economy under further pressure?

Yesterday was quiet for UK economic data and sterling traded pretty sideways despite the show of unity between Philip Hammond and Liam Fox. In a joint article in The Telegraph over the weekend they stressed any deal would not be indefinite or a ‘back door’ to staying within the union. This was a key joint statement as they were both seen as being on opposite sides in the run up to Brexit.

Today we have some key economic data in the form of the inflation data. Headline inflation is expected to remain constant at 2.7%. Based on the recent signposting from the Bank of England, the figure will likely be ignored, despite it being above target levels. During the August meeting, the eight-member Monetary Policy Committee voted 6-2 in favour of keeping interest rates on hold.

Wednesday’s average earning data will be closely monitored to see whether the pace of inflation continues to outpace salary growth. In addition, rail fares and season tickets are set to soar at their fastest rate for four years in a move likely to prompt fury among commuters and other passengers. Rail fares are pegged to the Retail Prices Index of inflation for July which is expected to post a reading of 3.5% tomorrow.

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EUR: eurozone data disappoints

There was disappointing data released from the eurozone yesterday, which flew under the radar given the ongoing news surrounding the Trump administration. It was reported that industrial output declined by 0.6% during the month, giving up half the previous month’s gains. This is not that much of a surprise given the increase in the strength of the single currency which makes its goods more expensive.

It is likely that it will be a quieter day today as France and Italy are on a bank holiday. However, the first release of the German Gross Domestic Product is set to hit the wires and could indicate that the pace of growth has increased.

USD: quiet day for data does the dollar a favour

With no major data announcements from the US yesterday, the dollar managed to claw back some of its recent losses as tensions eased between North Korea and the United States. Kathy Lien, the managing director of BK Asset Management, suggested a rise in geopolitical tensions could lead to a 3-5% fall in the dollar. Interestingly, Lien alluded to the Libyan Civil War in 2011, where we saw a 5% drop in the dollar and almost 9% in the run up to the second Gulf War in 2003.

Unlike yesterday, we have a busy day ahead for economic data. Retail sales for July are due and also housing information. Retail sales are forecast to edge 0.3% higher in July and, if this is the case, it could bring the interest rate debate back to the fore, causing further uncertainty in the market.

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