Hiking into a period of calm
The dollar sell off that was expected following Wednesday’s Federal Reserve minutes continued yesterday and through the Asian session overnight. This is not a sudden fearful jettisoning of the dollar as a result of collapsing inflation or interest rate expectations but more of a slimming of the positioning that has so marked currency markets for months now.
History dictates that the dollar rallies into a rate rise by the Federal Reserve and then softens as the eventual hiking cycle becomes more ingrained. With the justifiable belief that the Federal Reserve will be keeping a very feathery foot on the accelerator through the coming years, there is little to suggest a manic run higher for the greenback.
Comments from Fed members have only served to emphasise this and the fractious nature of the past few rate meetings – Fed members wanting to vote for a hike but not doing so as a result of global pressures – means that the bar is set very low for further vacillation as we move forward.
Draghi needs to do more
The euro has bounced back slightly despite the dovish words of the European Central Bank. As we highlighted yesterday, it is becoming clear that the most important central bank meeting in December is not that of the Federal Reserve but instead the European Central Bank on December 3rd.
Even then we are having difficulty pricing expectations; while traders are pricing in a 10bps cut in the deposit rate with 100% certainty and a 20bps cut to about a 50% certainty there is no real way of pricing in increases in quantitative easing.
As a result, one has to think that calls for parity in the short term look overdone as it would take a real policy shift by the European Central Bank or another deflationary action from China or commodity markets to hammer the single currency.
UK consumers sit it out in October
GBP tripped from the highs yesterday as consumers took a breather in October, as has been the trend. This year is no different given September’s number was boosted by strong spending around the Rugby World Cup and warm weather and we have seen a natural pause on the nation’s high streets before the manic festive season begins.
Overall a picture of strong consumption should remain into 2016 given the increases in wages that we have seen in recent months alongside inflation that will remain below the Bank of England’s target well into next year. We would be very surprised if the retail atmosphere did not pick up in November, especially given the UK consumer’s love of all things ‘Black Friday’.
The Day Ahead
With the lack of a data calendar, we are expecting today to be quiet and trade to be sideways.