Forex Market Review (European Session) – Strong US data fails to halt dollar pullback; pound perks up but euro still struggling

Forex Market Review (European Session) – Strong US data fails to halt dollar pullback; pound perks up but euro still struggling

The US dollar continued to consolidate in European trading on Monday after recording fresh three-month highs on Friday. Speculation that President Trump is likely to opt for a dovish candidate to head the Fed triggered the greenback’s sell-off on Friday, while new political headaches for the White House further weighed on the US currency today. In European currencies, the euro attempted to move away from last week’s three-month lows but struggled to regain momentum. The pound was stronger however, as investors geared for the first UK interest rate rise in 10 years.

The week’s first day of trading saw an unusually large number of data releases, with German retail sales kicking off the European session. Retail sales in Germany rose by a bigger-than-expected 4.1% year-on-year in September. There was more positive data from the Eurozone economic sentiment index, which surged to a 17-year high of 114.0 in October, beating forecasts of 113.4.

The data helped the euro recover to $1.1642 by mid-session but was unable to sustain its gains and quickly retreated to settle around $1.1615. Weaker-than-expected German inflation numbers released later in the session weighed on the single currency. German consumer prices rose by 1.6% y/y in October according to the flash reading, down from 1.8% in September and below forecasts of 1.7%. The EU-harmonized measure also missed estimates, coming in at 1.5% versus expectations of 1.7%.

The figures underline the slow progress for inflation in the Eurozone to rise towards the ECB’s 2% target, hence the central bank’s decision last week to extend its asset purchases by a further nine months, though at a reduced pace.

Relative calm in Spain’s Catalonia region provided relief for investors following Friday’s decision by the Spanish senate to approve the cabinet’s decision to impose direct rule over the restive region. There were fears of civil disobedience after the Catalan parliament was dissolved and snap elections called but so far there have been only few and peaceful protests.

The pound recouped Friday’s losses, reaching a session high of $1.3200 as expectations that the Bank of England will raise rates on Thursday lifted the British currency away from near three-week lows touched on Friday. Sterling was last trading around $1.3190, with any gains likely to be limited given the apparent split within the MPC in support for a rate rise this month.

With a December rate-hike already mostly priced in, solid data out of the US failed to have much impact on the greenback. Personal spending in the US jumped by 1.0% in September – the most in eight years and above expectations of 0.8% and the prior 0.1%. Personal income rose by 0.4%, in line with expectations. Wages and salaries also bounced back, rising by 0.4% after a 0.1% gain in September. Spending during the period was boosted by auto sales as households replaced their vehicles damaged from the hurricanes hitting the east coast.

The upbeat data follows Friday’s robust third quarter GDP figures. However, higher growth has yet to translate into higher inflation as indicated by the PCE price gauge. The core PCE price index, which is closely tracked by the Fed, was unchanged at 1.3% y/y in September, well below the 2% objective.

The subdued inflation picture will be the main reason for the Fed to hold rates unchanged on Wednesday when it concludes its two-day monetary policy meeting, though it is widely expected to resume with its rate hike cycle in December. The Bank of Japan is also expected to stand pat when it announces its decision tomorrow.

The yen was broadly firmer ahead of tomorrow’s decision. Dollar/yen was 0.3% down on the day at 113.31, below Friday’s 3½-month high of 114.44 yen. The dollar index was also slightly down at 94.75.

The dollar came under pressure on Friday on reports suggesting that Trump is leaning towards Fed Governor Jerome Powell to be the new head of the central bank. Powell is perceived to be slightly more hawkish than current chair Janet Yellen but not as much as John Taylor, who was the previous favourite to be Trump’s pick. An announcement is expected on Thursday.

US treasury yields fell back from recent highs on the reports, but renewed political concerns also dampened sentiment for the greenback today. Trump’s former campaign manager, Paul Manafort, and his business associate, Rick Gates, were indicted on several charges today, including money laundering, fraud and for failing to register as agents of foreign interests. The charges are part of special counsel Robert Mueller’s investigation into possible Russian collusion with Trump’s campaign team during the 2016 presidential race.

Gold prices saw limited response to Trump’s latest political woes. The yellow metal was mostly flat at around $1274 an ounce in late European trading. Oil prices meanwhile eased from earlier new highs to stand just 0.1% higher on the day. WTI crude was last trading at just under $54 a barrel and Brent crude stood at $60.51 a barrel.

Source: Trade Forex with XM.

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