All eyes on US, as UK stabilises post-Brexit

All eyes are on the US this week, as the world waits to find out whether interest rates will rise this year.

Janet Yellen, Chair of the Federal Reserve, will deliver a speech this afternoon at Jackson Hole, which will address the current state of, and outlook for, the US economy. In it, experts are hoping that she will signal whether the Fed is likely to hike rates again this year, although Reuters reports that futures markets are pricing in only a 20 per cent chance of rates being increased in September. The chance of a rate hike in December is higher at 50 per cent.

With the market on tenterhooks, the pound has risen slightly against the dollar this week, following positive data from YouGov and Cebr indicating improving consumer confidence in August. Indeed, with July seeing a sharp drop after the UK’s vote to leave the EU referendum, the data has been welcomed as a sign that the country is stabilising following the initial period of shock – a promising sign for the pound, although it remains flat against the euro at €1.688, notes The Guardian.

The spotlight, though, remains on America – and if there is a significant hint of rate hike on the cards, no matter what the UK does, the dollar is likely to go soaring.

 

US dollar softens after strong week

12th August 2016

The US dollar softened at the end of the week, as mixed economic data continues to counter optimism surrounding an interest rate hike.

Economic data last week found that payrolls increased above expectations in July, with rising wages adding to the perception of the US outperforming most other countries in the world. That bullish mood, though, was curtailed somewhat with later data showing that productivity among workers had fallen and retails figures today showing that sales stayed unexpectedly flat in July 2016, despite an expected rise of 0.4 per cent.

“The US retail sales data in particular is causing the dollar to weaken,” Nick Bennenbroek, head of currency strategy at Wells Fargo Securities in New York, tells Reuters.

The mixed data has added to the general air of uncertainty about the potential for a Federal Reserve rate hike in the near future. Indeed, the country has swung between bullish and bearish in recent months, with the decision raise rates postponed each time. The UK, meanwhile, has cut its rates to a record low, following the vote to leave the European Union, emphasising how quickly things can change and how global issues can impact local economics.

Fed Chair Janet Yellen will make a public statement about the US economic outlook on 26th August is expected to clear up some confusion surrounding the possibility of a rate hike, but may just reinforce the country’s existing wait-and-see stance, with a hike in September looking increasingly unlikely. The next opportunity will then be a meeting in December 2016.

The dollar fell 0.46 per cent against a basket of six major currencies, reports Reuters, although the pound has invidually fallen against the greenback, after ONS data in the UK found that construction output had dropped 0.9 per cent in the run-up to the EU referendum. The pound is now 0.2 per cent down, trading at $1.2946.

Dollar rallies as US economy picks up

5th August 2016

The US dollar rallied this week, as new data boosted confidence in the country’s economy.

Official figures showed that employment growth outperformed expectations in July 2016. U.S. non-farm payrolls jumped by 255,000 jobs, far ahead of the 180,000 predicted by economists in a Reuters poll. The improvement follows an upwardly revised surge of 292,000 in June 2016.

“This represents more of a return to the form of the first six months of the year, and indicates Fed Chair Janet Yellen is presiding over a strong but not spectacular U.S. economy,” Dennis De Jong, managing director at broker-dealer UFX.com in Cyprus tells the news agency.

With unemployment now declining to levels last seen before 2008 and wages also rising, speculation is once again climbing about the potential for a rate hike by the Federal Reserve.

“Fed fund futures priced in an 18 percent chance the Fed will hike rates at its policy meeting next month, from 9 percent late Thursday, according to the CME’s FedWatch tool,” reports Reuters.

At a time when the European Central Bank has dabbled in quantitative easing and the UK has just lowered its base rate to stimulate the economy after its vote to leave the EU, the possibility of a rate hike in the US is a strong endorsement in the confidence surrounding America’s economy. That bullish sentiment was enough to drive the US dollar to a one-week high against the euro and Swiss france.

Bloomberg reports that the greenback climbed against most major currencies, which may help it recover from a slump of around 4 per cent this year so far.

“We’ve been long-term bullish on the dollar and we continue to be,” Kathy Jones, New York-based chief fixed-income strategist at Charles Schwab & Co, told Bloomberg. “This number should push us more towards a rate hike and more divergence.”

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, rose 0.4 per cent this morning, up 0.5 per against against the euro to $1.1074 and 0.3 per cent to 101.55 yen.

The strong dollar has been a major factor in investment trends in the last year, with figures from the National Association of Realtors revealing that the strengthening greenback resulted in a slight deline in international sales dollar volume of US property.

For the fourth year in a row, buyers from China exceeded all countries by dollar volume of sales at $27.3 billion, which was a slight decrease from last year’s survey ($28.6 billion) but over triple the total dollar volume of sales from Canadian buyers (ranked second at $8.9 billion).

“Although China’s currency modestly weakened versus the US dollar in the past year, it’s much stronger than it was 5 to 10 years ago, thereby making U.S. properties still appear reasonably affordable over a longer time span,” explains NAR Chief Economist Lawrence Yun.

The US dollar’s performance, though, could be significantly altered by the upcoming US election, depending on who is voted into the White House.

Nikolas Xenofontos, Director of Risk Management at easyMarkets, believes that the wildcard factor of Donald Trump in this year’s election could have a big impact on the US economy.

He explains: “The rise of an anti-establishment candidate like Donald Trump speaks volumes about the desire for change in the US. Party-line politics have been left behind, with Trump standing out as a self-financed candidate who isn’t beholden to any special interest groups and doesn’t plan on following the usual script that most successful candidates use to reach the White House. This independence is both refreshing and worrying when it comes to the financial markets, as there are a lot of unknown factors at play, which could serve to make investors nervous over the coming months.”

Donald Trump’s musings on economic change and policy, should he become president, have “already caused a stir”, notes Xenofontos, who highlights his floating the idea of replacing Janet Yellen as Chair of the Federal Reserve and his comments regarding the benefits of a weak dollar.

“While there are certain benefits, it sounds better to have a strong dollar than it actuality it is,” he has said.

Indeed, the UK’s recent vote to leave the European Union caused the pound to plunge in the immediate aftermath – and prompted a wave of foreign investment from those looking to take advantage of the beneficial currency exchange rates.

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