US Dollar Fights Back

Overnight we saw a strong US PMI figure of 57.8 vs 55 expected which set the tone for the rest of the session. This also pushed the chance of another Fed rate hike by the end of 2017 up to 2/3. This all comes as a welcome sign for Dollar bulls following one of the worst weeks of the year. Traders will still have their eyes firmly set on Fridays Non-Farm Payrolls to confirm this change in sentiment after its major peers had a bumper week on the back of signals of policy changes from central bankers.

This Dollar strength aided by a solid miss from UK Manufacturing PMI which kicked off a busy week for the Sterling with 4 major data releases. The market is expecting big things to explain the BoE Governor Mark Carny’s U turn last week from dove to hawk. But just as if to remind Sterling traders that the doves are still alive and well in the BoE’s Monetary Policy Committee, member Gertjan Vlieghe (A known dove from Rakuten bird watching) was quoted in the Independent saying, the bigger risk is an early rate hike.

Also helping the Dollar index strength were more comments from spooked ECB officials trying to take back Draghi’s words of last week after a relatively sharp sell of in European stocks. The reason for this is that any move away from the ECB’s ultra accommodative monetary policy of record low interest rates and extensive QE (essentially money printing) reduces the pool of cash available and increases the cost of capital for European business’s to borrow, sending share markets south.

It seems markets are entering a stage of a new normal. Central banks are shaping to move away from record low interest rates as global economic conditions slowly improve. Traders will now be able to focus more on interest rate differentials between currencies, and move away from focusing on the rate of acceleration of the US recovery compared to the rest of the world.

The first Central Bank expected to make that move is the Bank of Canada next week and from recent comments we can expect shaky trigger fingers in coming months from other policy makers who haven’t felt the feeling of a rate hike in the best part of 10 years. Before then however we need to continue to see positive data and the next cab of the rank is the 2nd major UK data release for the week, Construction PMI tonight followed but Services PMI tomorrow. A bit closer to home we will hear from the RBA at 2.30 this afternoon with no significant changes to the statement expected.

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