Dollar Gives Back Some Gains But Remains in Favorable Ranges

After gaining much of yesterday, the greenback is slightly on the back foot to start today session.

Overview

U.S. equity futures are solidly in the green and global indexes rose overnight amid growing expectations China will reduce tariffs on U.S.-made cars. Trade tensions between the U.S. and China have been partially to blame for the sell-off in equity markets that begun in October.

Recent dovish Fed-speak and poor economic data (most notably Non-Farm Payrolls last Friday) have led investors to roll back bets that the Federal Reserve will raise interest rates for a fourth time this year next week. The probability of a rate hike fell from 78% at the beginning of the month down to 67% after the jobs numbers on Friday. We believe the central bank will raise rates but they may also add a dovish tone when speaking about the future path of hikes. Expect next Wednesday to be a pivotal day for the greenback.

This morning’s economic data will add support to our argument that the Fed will raise rates. Producer prices rose in November, slightly higher than the expectations of a flat reading. The annual gain slowed to 2.5% from 2.9% but is still higher than the Fed’s overall inflation target. Bloomberg news puts it best: While the plunge in global oil costs is keeping headline inflation muted, the tariff war with China means producers may face higher materials prices and supply chain distributions.”

What to Watch Today…

  • • No major events scheduled for today.

EUR

The Euro fell yesterday as the greenback reigned supreme in a wide-spread “risk off” environment. The common currency is attempting to claw back some of its losses but its gains are likely to be limited after Italy’s Finance Minister confirmed that the country will not make major changes to its budget.

We expect EUR/USD to trade in choppy, yet relatively tight ranges ahead of Thursday’s ECB policy announcement and press conference.

GBP

Today was supposed to be the day that Parliament was to vote on Theresa May’s plan to divorce the European Union. However, the PM pulled the vote yesterday as it appeared certain she would face a lopsided defeat. Instead, the Prime Minister has decided to head back to Brussels in an attempt to secure more assurances. As May spoke to the House of Commons yesterday, the sterling dove lower and touched its weakest level since April 2017.

The sterling found a small amount of support overnight as a report showed that U.K. wages rose at the fastest pace since 2008. However, pound bulls should not get too excited as a “no deal” Brexit is still a possibility and would cause the sterling to reach new lows. Uncertainty remains the name of the game.