Index set to test resistance.
The dollar index which measures the performance of the greenback against the currencies of six of its major trading partners is looking set to test its medium term resistance at 94.10. The weakness of two of its main constituents; the pound and euro, together with the return of risk appetite and election jitters affecting the Yen, means that the dollar is reacting positively to talk of a December rate hike.
Interest rate futures are predicting a 75% chance of a hike in December and traders are already looking to what will happen in 2018. There are concerns that the “new Fed” as Janet Yellen is replaced in January will be more dovish that what we have seen most recently and it is entirely possible that the new Chairman will want to gauge the effect of withdrawal of extraordinary measures and the latest hike before making any further change.
Versus the single currency the dollar reached 1.1760 yesterday still shy of major support at 1.1660 although given the headwinds facing the Eurozone a further rally for the dollar could see that level tested and conclusively broken. Sterling is facing its own pressures but the possibility of a change in monetary policy is providing support.
Sterling facing uncertainty despite rate hike hopes.
If Traders are prepared to accept a mediocre services PMI report as evidence of a likely rate rise next month then Mark Carney has done an even better job of convincing them that the term “in the coming months” means November than most analysts give him credit for.
Only history will tell whether a rate hike next month has the desired effect on the currency, since that is the only reason a rate hike can be considered. It is a high risk strategy that could easily backfire if the lack of business investment that has been a major contributor to slow wages growth is further dampened. The traders adage of buying the rumour and selling the fact could come into play if they feel that this is not the first in a series but more a one off to “test the water”. The pound has remained steady against a weakening common currency but reasons for traders to establish new long positions are few and far between.
With inflation and employment data imminent, the pound can be expected to tread water and continue in a reactive mode until the numbers have been digested. The BoE will release its Quarterly Inflation Report on November 2nd which coincides with the MPC meeting. If the report predicts further rises in inflation, MPC members who will have seen an advance copy of the report are likely to vote for a hike.
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Brexit to hurry a new Political Paradigm
The handling of Brexit and the alternatives that are being offered are perfect examples of a country that needs to shake up its political system. The very least is a change to the outdated “first past the post system” that elects a Government that barely represents the interests of the majority which is surely the minimum expectation the public should be afforded.
The June election showed that the young can be galvanized if they believe that change is possible. It is unfortunate that Jeremy Corbyn’s actions in appearing at a music festival simply masked a cynical political act that had it worked would have shown just how mired his party are in the past.
Brexit is an opportunity that looks likely to be squandered in the same manner as North Sea Oil. The Norwegian Sovereign Wealth Fund has recently reached one trillion dollars. This is an example what can be done by progressive politicians.
A hard Brexit looks an ever more likely scenario. The impasse looks likely to remain as the payment demanded by the EU is unable to be even contemplated by the Government which ranges from the “go whistle” of Boris Johnson, to the offer of an “interim payment” from the Prime Minister. The folly of allowing Brexit to become a party political issue is now becoming clear to all.
