Dollar in fine fettle
The US dollar rebounded sharply last week, taking advantage of the euro’s bout of weakness but also buoyed by some robust fundamentals. Indeed, headway passing of tax reforms and the two-week extension of federal funding were positive signals for the US economy, as was the announcement that discussions regarding Trump’s election infrastructure programme are to begin. Finally, the relative resilience of the macroeconomic data coming out of the US also helped fuel the greenback’s rebound with the DXY dollar index rising to 94.
Meanwhile, last Friday’s Employment Situation Report failed to lift the US dollar higher. Although job creations were sturdy – reaching over 200,000 – the 2.5% year-on-year (YoY) increase in average hourly earnings in November was weaker than had been expected. While such developments are unlikely to impact the expected Fed Funds rate hike, it does point to a potential normalisation of the Federal Reserve’s (the Fed) monetary policy, which may well now be conducted at a gradual pace.
That said, several publications such as the CPI and retail sales are due to be released soon and it is these figures that the market will scrutinise to attempt to determine where the Fed’s 2018 monetary policy will be heading. The US dollar can, therefore, be expected to remain firm, bolstered by expectations of a hike in the Fed Funds rate.
EUR/USD Heading towards 1.1685
After appreciating strongly in recent weeks, the euro ended up running out of breath in the run-up to the monetary meetings of the Fed and European Central Bank (ECB) – thus underscoring their divergence. With long euro speculative positions high, this can be expected to act as a brake on the upside in the short to medium term. In fact, a partial squaring of these positions may well bring the EUR/USD back to earth in coming months.
With the interest rate spread remaining mostly unchanged – in turn, providing limited support to the currency – and 3-month cross-currencies indicating strong demand for the US dollar (particularly against the euro), this points to another negative performance this week by the single currency.
As in the US, publications scheduled this week – notably the French and Spanish CPI – will be watched to see what light they might shed on not only the central bank’s future guidance, as well as the meeting itself, but also the lookout for 2018.
EUR/GBP Stable around 0.88
Sterling ended up staging a timid recovery to 1.34 against the US dollar on news that the UK and EU have reached an agreement on phase-1 issues, opening the way for phase-2 negotiations over a trade agreement. The euphoria, however, quickly subsided given the uncertainties surrounding the future trade agreement, with negotiations expected to drag on for years.
In the coming days, watch out for the European Summit on 14 December, which is expected to confirm when phase-2 negotiations will open. What’s more, the Monetary Policy Committee (MPC) is due to meet; while there will also be the publications of the latest employment data (in particular hourly earnings) and inflation data. In this environment, the EUR/GBP can be expected to remain stable around 0.88.
USD/JPY: heading towards 114.5
The USD/JPY kicked off last week with a consolidation, which took the pair towards 112.2, before staging a vigorous rebound towards 113.5 – despite the stronger-than-expected Japanese GDP growth in Q3 (2.5% yoy when consensus had been for 1.5%). Paying no heed to the publication, the pair continued to track US long interest rates. One can therefore expect the USD/JPY to extend its rise towards 114.5.
CHF: EUR/CHF on course towards 1.16
The EUR/CHF tested anew 1.17 before correcting towards 1.167. The resurgence of risk appetite played against the Swiss currency. Despite the EUR/USD weakening, the EUR/CHF appreciated, which suggests that the Swiss National Bank (SNB) probably intervened to prevent a depreciation of the EUR/CHF.
In the coming days, watch out for the monetary meeting of the SNB, which is likely to once again indicate that the Swiss franc is overvalued. As such, the SNB should keep its monetary policy on hold for a prolonged period given the weak inflation. Even so, the EUR/CHF can be expected to go on and test 1.16 by the end of the month in the run-up to the Catalan elections.