Sterling Pops, Dollar Struggles

Sterling Pops, Dollar Struggles

Kathy Lien  | Feb 23, 2017 20:33

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

The U.S. dollar continued to struggle as investors sold the greenback, taking it lower against all of the major currencies. The problem lies in yields, which extended their losses despite relatively healthy U.S. data. Although jobless claims ticked up to 244K from 238K, the overall level of unemployment claims remains very low and house prices continued to rise in the fourth quarter while manufacturing activity in the Kansas City region grew quickly in February. These reports are consistent with other releases that show widespread strength in the manufacturing sector and continued recovery in the labor market. Unfortunately these releases along with comments from Fed President Lockhart and dollar-supportive comments from Treasury Secretary Mnuchin failed to lift the greenback. Even though U.S. policymakers have been all over the wires talking about the need for tightening, Fed fund futures show that investors are not convinced that the next rate hike will be in March. So while we firmly believe that the greenback will trade higher, it may not catch a bid before President Trump’s joint session before Congress on Tuesday or Yellen and Fischer’s speeches next Friday.

Thursday's best-performing currency was sterling, which traded sharply higher against all of the major currencies. The move was more technical than fundamental as GBP/USD broke quickly after clearing out stops at 1.2500. The only piece of data released from the U.K. was the CBI Retail sales report, which rose strongly in February, signaling a recovery in consumer spending after a particularly dismal January. The “big news” was from Scotland -- with the Scottish government openly discussing another Scottish independence referendum next year -- post Brexit, they are now convinced they could win. The main concern for the Scots is how hard the line for Brexit will be. Scotland voted to stay in the EU in last June’s referendum, but as a part of the U.K., its future lies in the hands of Theresa May. Although a vote wouldn’t be held until 2018, if a second referendum is announced in a few weeks as some politicians are pressing for, the renewed political uncertainty would be negative for the currency. Given the extent of Thursday’s breakout, we would not be surprised to see GBP/USD retrace to 1.25 but breakouts after long periods of consolidation tend to have continuation.

With no fresh political headlines to threaten the currency, the euro extended its gains versus the greenback. Data was benign with German GDP growth confirmed at 0.4% in the fourth quarter. We heard from a number Eurozone policymakers on Thursday including Nowotny, Praet and Weidmann. They all seem to agree that while the Eurozone economy is improving and inflation is on the rise, there’s no need to change interest rates this year. The strength of the euro had more to do with U.S. dollar weakness than inherent demand for the single currency. Although the rally in EUR/USD stalled at the 50-day SMA, the lack of any dollar-positive news on Friday means we could still see near-term gains in the pair. But ultimately, political uncertainty and hawkish Fed policy should limit any meaningful rally.

The Australian, New Zealand and Canadian dollars all gained strength with AUD rallying despite disappointing data. Australian private capital expenditure fell by -2.1% in the fourth quarter, which was a much larger decline than the -0.5% forecast. Gains in the Aussie were led by gains in gold and a lower U.S. dollar. There were no economic reports from New Zealand but the oversold NZD was one of the biggest beneficiaries of U.S. dollar weakness. USD/CAD, on the other hand, tumbled as oil prices moved higher on the back of inventory data. According to the latest report, US crude inventories fell by 884,000 barrels last week. Canada’s consumer price report is scheduled for release Friday and the sharp drop in the price component of IVEY PMI points to a lower release.

Kathy Lien

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