The U.S. Dollar is at 7 month highs on Fed hawkishness and support from euro, loonie, and pound weakness. The euro is still experiencing a hangover from yesterday’s ECB conference, where ECB President Mario Draghi disclosed that the expected QE tapering in March 2017 had not been discussed. He also revealed that a tampered tapering or extension was possibly, bringing the euro to its 7 month low. The loonie weakened today against the dollar as poor CPI and sales reports were released. Pound sterling also fell as the EU Summit rhetoric hinted at tough negotiations on post-Brexit trade agreements.
The euro is going on its 3rd consecutive day of weakening, catalyzed by ECB president Draghi’s opaque dovishness yesterday. The ECB’s substantial QE program had an estimated horizon of March 2017, but this may be less of a hard stop than originally anticipated. More clarity on extensions or tapering will be coming in December, and we can expect significant resulting volatility at that time. The hangover from yesterday’s ECB press conference has led the euro to 7 month lows against the U.S. dollar, which is now sitting around 1.0890.
The pound dropped off this morning as Theresa May was met with a cold shoulder at the EU summit, creating expectations of stiff negotiations on post-Brexit free trade agreements. As UK Prime Minister Theresa May attempted to extend an olive branch and assert that the UK would continue a strong partnership with the EU after Brexit, while French President Hollande stated that a hard Brexit would be met with tough negotiations. Dollar strength has also weighed on cable, exacerbating weakness further.
The loonie was flat overnight heading into the CPI, only to fall to one week lows over disappointing CPI and core retail sales in particular, which grew at 0% instead of the projected 0.4%. This also comes in the wake of Poloz’s comments revealing that the Bank of Canada had actively discussed stimulus expansion. Negative signs like this CPI and sales disappointment increase the likelihood of that dovish policy move. The Canadian dollar broke through the 1.33 level and sits just above there now.
The U.S. dollar is back at 7 month highs against a basket of currencies, due to momentum from New York Fed President Dudley’s hawkish statements on Wednesday, and from continuing euro weakness after the ECB press conference yesterday. The greenback is consequently at its strongest against the euro in 7 months. A December rate hike is being considered more concretely priced in at this point, as well. Any disruptions in this narrative from FOMC member speeches today and Monday may shift these expectations and cause dollar volatility.
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