Variable influences drive narrow ranges
As traders try to hang on to the profits they have made during the year the dollar’s direction has become tougher and tougher to predict due to the increasing number of contradictory influences it is seeing.
Politics, fiscal reform, monetary policy and macroeconomic data are all having their say in trader’s decision-making processes as ranges narrow given the reticence of traders to take anything other than small positions with tight stop losses.
The whole “Russian story” has blown up again with the President in danger of becoming directly involved as his son in law is implicated in contacting Moscow during the campaign and Trump himself still being accused of trying to get the FBI to “back off” in its investigation of Michael Flynn who has now admitted to lying when interviewed.
The dollar index has been well supported at it recent low of 92.50 but selling interest has been sparked upon an approach to 93.50. It is probable that there will be continued volatility between these two levels, but it will take some decisive news to see one of those levels broken. The Fiscal Reform Bill has now passed through Congress and early in the New Year it is likely that the President will announce his economic stimulus measures.
Brexit countdown begins
Today is the day when Donald Tusk’s deadline for the U.K. to accede to the demands of the EU. expires. It is understood that there has been agreement over the “divorce bill” and there has been progress over the Irish border even though there is scepticism in Dublin. It remains to be seen what has been discussed regarding the treatment of EU nationals remaining in the U.K. following Brexit.
The pound has now fully recovered the loses it incurred following last month’s “dovish hike” although the realization that there will be no monetary policy support going forward hasn’t yet been fully priced in.
The agreement of the EU Heads of Government at their summit next week to move the talks to stage two where the future relationship will be discussed could be a “double-edged sword from the pound. On the one hand, if the agreement is deemed as fair and equitable and the two sides have move on level terms then the pound will rally. However, if it seems that the U.K. has “caved-in” to EU demands then the pound will suffer as the Government comes under pressure to walk away.
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Employment data to set the scene
As Jerome Powell prepares to take over as Chairman of the Federal Reserve, he has commented that the case for a rate hike this month is coming together.
It is uncertain, when he made that comment whether he was in receipt of an advance release of the employment report which is due for release this Friday. With a headline expected to be close to the October figure of 261k new jobs created, it is the hourly earnings that will most interest FOMC members.
If they are true to their comments about inflation, a hike will be a tough call for them. Wage inflation is expected to be around 2.4% in November hardly out of control but just possibly in need of a tweak to ensure that when the CPI starts to rise wages do not get out of control.
Eurozone wide GDP is also set for release this week with a rate of 2.6% expected this when viewed in conjunction with inflation is unlikely to bring about any change to the ECB’s steady as she goes policy with any change to monetary policy unnecessary until this time next year at the earliest.
Interest rate differentials are likely to remain a major determinant of FX rates in 2018 and this should provide a level of support to the dollar although following a hike next week it is unlikely that the Fed. will hike again until Q2.
