Dollar rises on market expectation of Fed rate hike in March and political woes in Europe: Feb 22, 2017

Market Review - 21/02/2017  22:22GMT  

Dollar rises on market expectation of Fed rate hike in March and political woes in Europe

The greenback ended higher against majority of its peers on Tuesday as speculation of a possible Federal Reserve rate hike in March drove the buck higher. The euro was also under pressure due to market concerns over anti-European Union rhetoric from French presidential candidate Marine Le Pen and Dutch candidate Geert Wilders ahead of the first round of French elections on April 23. 

The greenback rose broadly at Asian open after hawkish comments by several Fed officials starting with Cleveland Fed President Mester on Monday, then more hawkish remarks by Philadelphia Fed Harker 

Versus the Japanese yen, dollar traded with a firm bias in Asia and gained to 113.71 in Asia before retreating to 113.42 in European morning. The greenback found renewed buying there and rose to session highs at 113.78 at New York open, however, the pair pared its gains and retreated to 113.44 in New York morning after the release of weaker-than-expected U.S. manufacturing and services PMIs before staging another rebound. 

In a report, market research group Markit said that its flash services purchasing managers' index (PMI) eased to 53.9 in February, from the prior month's reading of 55.6 which had been its fastest expansion since November 2015. Analysts had expected the reading to increase to 55.8. 

Markit also said that its flash manufacturing purchasing managers' index (PMI) fell to 54.3 in February from the prior month's final reading of 55.0. Analysts had expected a slight increase to 55.3. 

The single currency dropped to 1.0577 in Asia and continued to ratchet lower in Europe, hitting session lows of 1.0526 in New York morning on cross-selling of euro especially vs sterling. Later, price pared its losses after soft U.S. PMIs and staged a minor recovery to 1.0551 on dollar's broad-based retreat and traded narrowly in New York afternoon. 

The British pound dropped from Asian high at 1.2482 to 1.2435 before staging a recovery to 1.2460 ahead of European open. However, cable met renewed selling there and tumbled to an intra-day low at 1.2402 ahead of New York open. However, the pair pared its losses and rebounded strongly to 1.2474 in New York morning on dollar's weakness together with cross-buying of sterling vs euro, price maintained a firm bias in New York afternoon and inched higher to 1.2479. 

In other news, BoE's Carney said 'for the last few years there has been some discomfort among MPC; members that equilibrium unemployment rate estimate was too high; UK households tend to look through economic uncertainty unless it leads to tighter financial conditions; inflation overshoot is entirely caused by currency factor; since November there has been no uptick in market inflation expectations; short-run inflation expectations rising in UK, but market medium-term expectations not rising, consistent with temporary overshoot of inflation; expect UK inflation to fall back in 2021.' 

On the data front, The preliminary euro zone manufacturing purchasing managers' index inched up to 55.5 this month from a final reading of 55.2 in January. Analysts had expected the index to drop to 55.0 in February. The flash services purchasing managers' index climbed to 55.6 this month from 53.7 in January, easily surpassing expectations for a reading of 53.7. 

Data to be released on Wednesday: 

Australia WPI, China house prices, Germany Ifo data, Italy CPI, HICP, UK GDP, EU CPI, core CPI, Canada retail sales, U.S. redbook, existing home sales and FOMC minutes.