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Dollar rally powers on as market consensus shifts to December hike

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9 October 2017

Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

The US Dollar continued to grind higher last week against just about every other major currency.

he constitutional crisis in Spain over Catalonia prompted some safe haven flows towards the greenback early on the week. Strong macroeconomic surprises and hints of upward pressures on prices in the US finished the job and the Dollar ended the week at its highest levels since July.

Sterling was the biggest loser last week, as Conservative disunity and Theresa May’s precarious leadership raised fresh questions on the UK’s ability to negotiate a decent Brexit deal in time for the March 2019 deadline.

The inflation release in the US on Friday will be the key event risk for currency markets this week. Any upwards surprise in the core inflation number will likely seal an interest increase at the Federal Reserve’s December meeting. Markets will also follow closely news of the Spanish crisis, which could weigh on the Euro.

Major currencies in detail


Theresa May’s woeful speech at the Tory Conference last week brought fresh doubts about the strength of her position as Prime Minister, amid persistent talk about her lack of support among Conservative MPs. Markets reacted ruthlessly, sending down Sterling to be the worst performing major currency last week. This week looks to be light on the data front. Expect the Pound to trade off leaks and headlines from the fifth round of Brexit talks that begin on Monday.


Absent significant news from the economy or the ECB, the Euro traded mostly in reaction to the strong economic news out of the US, with an eye on the developing constitutional crisis in Spain over Catalonia’s status. So far, the impact on the common currency appears to be very modestly negative. A unilateral declaration of independence next week could escalate the issue and pile on the negative pressure, however. In addition to political headlines, markets will be focused on the industrial production report out Thursday as well as any signs of progress in German coalition talks.


The September employment report was affected by hurricane disruptions in the US, and therefore needs to be carefully interpreted. The negative headline number almost certainly reflects the inability of many businesses in Texas and Florida to operate fully. The big jump in wage gains is perhaps somewhat more meaningful and helped the market raise the probability of a December hike to above 80%. We think this report should be largely ignored and await the next one for confirmation that the long-desired wage gains have finally arrived.

Next week inflation numbers should similarly reflect some impact from the hurricanes, but we think the core measure which excludes volatile food and energy components will still be meaningful.