The US dollar is mostly little changed as the broad consolidation that has emerged this week continues. The two powerful forces that have emerged–expectation of a Fed hike at the end of the year and European political challenges–appear to have reached a tentative equilibrium. Meanwhile, US President Trump’s comments about “wiping out” Puerto Rico’s $74 bln of debt remind investors of the unorthodox and unpredictable impulses from the US.
Two currencies, sterling, and the Australian dollar are exceptions to the general calm of the foreign exchange market today. Sterling’s story is mostly about politics, it appears, while the Aussie’s weakness is in response to unexpected weakness in retail sales.
UK Prime Minister May stole some thunder from the opposition by proposing the cap household energy prices, and boost social housing. Utility share prices did what one would expect in the face of a price cap and retreated. It was the hardest hit sector in the FTSE 250 on Wednesday, losing 0.7%, while the index as a whole slipped 0.3%. Her overall performance appeared to have failed to reset her administration. Sterling was slightly firmer before the Prime Minister spoke, helped by the stronger than expected service PMI.
However, sterling trended lower and recorded the session lows late in North American turnover. The main factor that has slowed sterling’s descent in the face of the weak political backdrop and the poor technical condition is the anticipation that BOE will raise rates next month. While sterling has nearly returned to levels against the dollar last seen at the last BOE meeting’s hawkish forward guidance, the implied yield of short-sterling futures strip and the OIS remains high (implying around an 80% chance of a hike), and, of note, higher than the odds of Fed hike before the end of the year.
Sterling traded sideways in Asia today, but as soon as European traders entered the fray, perhaps seeing how the British press reacted to May’s speech, sterling was sold. It has been pushed below $1.32 for the first time since the BOE meeting. The low on that day was about $1.3155. Sterling has also met the 50% retracement objective of the rally since late August. The 61.8% retracement is found near $1.3110.
