The greenback rocks
By Peter Rosenstreich
A load of positive factors are pushing the US dollar upwards. Most imminent is today’s report on America’s third-quarter GDP – which should be up 2.8% from Q2, significantly above the market expectation of 2.6%. This, despite flat home sales in September due to Hurricanes Harvey and Irma. Faster growth and tight labour markets will boost inflation close to 2.0%. All this will catch doubters flatfooted. The repricing of the US yield curve, which has already begun, as 10-yr treasury yields rose to 2.47%, will likely quicken. The December 0.25% prime-rate hike looks very likely, and so does a kick in of the Philips curve.
The Euro is especially vulnerable. It has been overextended, and the European Central Bank has signalled that its rates won’t increase until 2019.
As for the next Chair of the US Federal Reserve, speculation is that President Trump has eliminated current Chair Janet Yellen and contender Kevin Warsh, narrowing the field to Jerome Powell and John Taylor. Powell’s dovish stance and long relationship with Republican stalwarts gives him the odds-on chance. Trump is expected to announce his choice by 3 November. The markets will see it as a continuation of slow, gradual monetary strategy.
Euro not so much
By Yann Quelenn
Hawks on the run, ok, on the fly. The European Central Bank will inject 270 billion Euros into markets during Jan-Sept 2018. This, after 720 billion Euros this year. So ECB monetary policy will stay expansive, very expansive, diverging sharply with that of the USA.
EUR/USD was hit in trading, knocked from 1.18 to 1.16 Euros per dollar after yesterday’s ECB press conference. More downside on the euro is now very likely.