It’s not bee the economy that has been driving the dollar over the past 3 weeks, of that we can be pretty sure. Rather, it’s been expectations of tax cuts and spending increases, together with incentives for dollar repatriation under the new President. As such, there is a case to say that today’s payrolls numbers in the US will be secondary to this dynamic. There is a certain element of truth to that, not least because a Fed tightening later this month is fully priced in, so we’d have to see a huge fall in the pace of job creation for that belief to be tested and the dollar to soften as a result. Note that the past three releases have been only modestly softer than expectations. We have to go back to July/August for the releases that were significantly stronger than expected. For now, it’s Trump that’s driving the dollar.
Elsewhere, yesterday saw a decent day on sterling, with cable pushing 6 week highs above the 1.2675 level which marked the previous November high. We’ve pulled back a touch from that, but so far we’re in our fourth consecutive daily up day. There were some noises yesterday of a softer Brexit from the government, as there have been on other occasions this week, which gave some weight to the sterling rally. Naturally, today it’s going to be about the dollar side. Thereafter, we have the Italian constitutional referendum over the weekend. This has the potential to induce some volatility in the early part of next week. There are still a lot of undecided voters, so although the no side is ahead, the result is not a given. And even if this does come to fruition, a rejection of the reforms would lead to political instability in Italy and quite possibly to early elections.
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