Dollar index lower but within the recent range

It’s August. That’s about the only way to describe price action in the FX markets this week. The struggle to try to fit snippets of news to price action is beginning. The dollar index is lower overall but has stayed within recent trading ranges, as traders lack either the motivation or the reason to either open new positions or add to existing ones. It is very much a case covering customer requirements until the drivers return to the market.

In the case of the dollar, the prime driver of recent dollar strength has been monetary policy. There is little doubt that Jerome Powell’s Fed has surprised the market with just how hawkish their outlook for the economy has been. Having said that, with Q2 GDP at 4.1% they seem to have made the right call to adopt a continued tightening bias even if the President is hedging his bets by cautioning against “applying the breaks before the car has reached full speed”.

There are a couple of headwinds for the economy on the horizon which may see the Fed change from two more hikes this year to one which will probably happen next month. Were there to be a postponement to the hike that is heavily priced in for September 25/26, that could lead to a significant correction for the dollar.

Yesterday, the dollar index traded in a 95.37/94.99 range, closing in the middle of the range, at 95.18.

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Barnier thinks Fox cried wolf

The British newspapers have printed a whole raft of headlines this week illustrating just how bad a hard or no deal Brexit could be for the remaining 29 members of the EU. They have been perfectly timed to coincide with Trade Minister Dr Liam Fox’s assertion in a recent speech that the odds are 60/40 in favour of just that scenario. Coincidence? The cynic in me says no. It is more likely a concerted effort to try to wrestle the moral high ground for the delayed agreement on the future relationship back from Brussels.

The EU’s Chief Negotiator Michel Barnier believes Fox’s comments to be little more than tactical and prefers to wait to see what fresh amendments to the “Chequers Proposals” Theresa May brings to the table when the two sides reconvene early next month. If Mrs May’s “cupboard is bare” then Dr. Fox’s comments may have a little more than a ring of truth to them.

Sterling suffered versus the euro yesterday as several buyers of the single currency came to the market. It traded down to 1.1153, closing close to the low at 1.1560. Versus a weaker dollar, the pound managed to hold its own closing at 1.2939 just five pips below the opening.

Euro rally masks weakening data

Germany, the primary driver of activity in the Eurozone economy, has released several sets of data this week, each of which has depicted an economy that is slowing down. So far, there is no need for alarm bells or frantic calls to Mario Draghi’s Mediterranean villa, but if it continues and/or spreads to other nations, then Sr. Draghi may have to consider his cautionary words over the withdrawal of the Asset Purchase Scheme after all.

Any such action would, counter-intuitively, provide support to the euro as it could be argued that such a move could herald a rate hike before Q3 ‘19.

The German trade surplus fell to EUR 19.3 billion in June, around a billion below both expectation and May’s actual. Industrial production fell into negative territory, slowing by 0.9% after having grown by 2.6% in May.

At some point, Eurostat, the EU enterprise which collects and collates such data, will need to study the reasoning behind issuing individual members data as well as Eurozone-wide figures since it simply creates unnecessary volatility.

The single currency rallied versus a correcting dollar yesterday. It reached 1.1608, closing just nine pips lower. It has continued to rally overnight, reaching a high of 1.1629.