Sterling under more pressure

Dollar lift-off

So much for the dollar rally fading. The dollar has roared higher, cementing a rally on Thursday that has taken to its highest level in more than a year. The dollar is well bid across the board taking out fresh highs against its major peers but the steepest gains are in EM with the Turkish lira in particular getting hammered. That looks to be an economy in real trouble and investors are simply fleeing.

The dollar index rose to its best level since June last year, moving just shy of the 96 handle. Data showing a tightening labour market and a firm increase in underlying producer prices in July are helping the dollar. We are now looking ahead to the CPI inflation figures due at 13:30 today, which are expected to rise 0.1% on a monthly basis and 2.9% annually. Core CPI is due to rise  0.2% m/m and 2.3% y/y. Stronger inflation and a tighter labour marker will only support the Fed in raising rates and the USD in the process.

Trade tensions are also a factor underpinning the dollar’s strength, but it won’t do much help US exporters and we may therefore expect – given past performance – Donald Trump or some other player in the administration to talk it down. I wouldn’t be surprised to see a tweet on the dollar’s strength before long.

Sterling under more pressure

The pressure remains on sterling, which has hit fresh year lows versus the dollar. GBPUSD has sunk below 1.28 which opens up a move to 1.25 again. The fears of a no-deal Brexit have piled the pressure on the pound and the dollar’s rally has come as a sucker punch.

All eyes on today’s GDP print at 09:30 – if it doesn’t show firming activity then the Bank of England will look pretty silly having just hiked rates. The bets are increasingly that the BoE is shaping up for a rate cut next in the event of a no-deal.

However the consensus is for a good print that could help support sterling in the near term. After the Beast from the East hit Q1 figures, we expect a bit of a bounce back in Q2. 0.4% or even 0.5% may be seen and this could offer a sign of a resurgence through the rest of the year. The World Cup, a Royal Wedding and a sunny weather may have supported spending by consumers.

Euro loses support

EURUSD has fallen below the key support at 1.15 to trade at 1.1440, a move that opens up a retracement of the rally from 1.11. On the longer term technical picture, we see clear evidence that this is the completion of a large head and shoulders reversal pattern that could ultimately see the euro back to 1.05. The momentum is very much with the dollar and the near-term picture looks pretty bearish. Weaker EZ even with some firmer inflation could open up the differential with the US still further and ultimately we may see markets starting to price for the first hike to come in Q1 2020 as opposed to Q4 2019. Comments from the ECB that the risks to global growth have increased due to trade tensions are also a factor weighing on the euro at present. Italy remains a drag too as markets seem to be worried about the government embarking on higher spending and expansionary policies.

Yen firmer

Japan’s yen is holding its own against the dollar steamroller, as GDP growth exceeded expectations. Growth of 1.9% far exceeded the 1.4% forecast. Third and fourth quarter growth is also set to match this kind of level. This comes after firmer wage figures that indicate reduced slack in the economy that should be a welcome sign for the BoJ, although it is not likely to produce a reaction in the near term. Downside risks remain with the threat of auto tariffs if Japan does not sign a bilateral trade deal with the US. Overall, the uncertainty on Japan’s export led economy will remain a weight as long as trade tensions are a factor.

Lira battered

Turkey’s lira took out fresh record low against the dollar as talks in Washington failed and markets reacted with fright to a forthcoming announcement on a ‘new economic model’. USDTRY rose above the 6 handle. Erdogan’s claims to have ‘our people, our god’ won’t do much to calm investor fears. We await to see whether the central bank is ultimately forced to step in – but it may be too late and even a 200 basis point hike may not be enough.