USD Maintains Momentum while Sterling Falls to 1985 Low

USD

The U.S. dollar kept its momentum from yesterday’s trading session and extended gains against most of its major counterparts overnight.  The greenback found support yesterday following steady manufacturing data in the world’s largest economy.  In addition to decent data, the dollar benefited from bullish comments from Fed Reserve Bank of Cleveland President Loretta Mester who said a rate hike in November would “remain compelling”.  Chances of a rate hike by the end of the year are up to 61%, compared to 59% to start the week.

However, much of the overnight strength can be attributed to outside market forces.  For example, the Canadian dollar fell, reversing some of its gains from last week as the price of oil tumbled nearly 1.0%.

Today’s economic docket is light with only New York ISM manufacturing due out at 10 a.m.  Attention will then shift to tomorrow’s full docket that will include private jobs numbers, factory orders, durable goods and ISM service data.

GBP

The Sterling continued to take a pounding, falling to its lowest level against the U.S. dollar since 1985.  The pound has come under renewed pressure this week after new Prime Minister Theresa May said this weekend that she could trigger Article 50 this spring.  She also said that the financial sector will get no special favors in the EU exit talks.  Market participants fear that the U.K. will lose access to the European Union’s single market, which would put pressure on nearly every sector of the British economy.

Speculation will now mount on where the bottom is for the sterling.  The currency is already 14% weaker than the day before the “Brexit” vote in June.

JPY

The Japanese yen fell for the sixth consecutive day and policy divergence is against taking center stage.  Chances the Federal Reserve will boost rates again before the close of the year has strengthened the greenback across the board.  In addition, global stocks have rallied, weakening demand for the safe-haven yen.

A survey of Japanese companies showed that businesses are lowering their own forecasts for inflation in the coming years.  Despite excessive quantitative easing, the Bank of Japan has struggled to reach the price target growth of 2.0%.  The survey also showed that Japanese businesses expect the yen to weaken another 4% on average against the U.S. dollar.