The U.S. Dollar is rallying this morning, closing the week in stellar fashion after the release of Gross Domestic Product figures revealed a much better-than-expected expansion for the third quarter.
The U.S. Dollar is rallying this morning, closing the week in stellar fashion after the release of Gross Domestic Product figures revealed a much better-than-expected expansion for the third quarter. The American economy seems to have more than just survived through the natural disasters of the summer and the momentum has pushed the greenback to its highest levels overall since July 11th.
Major counterparts are now trading in multi-month lows as the combination of a thriving economy, the potential of tax reform, renewed policy divergence and success against ISIS are all boding well for the dollar to finish the year strong.
GDP grew at a pace of 3.0%, exceeding the estimated 2.6% level. Core Personal Consumption Expenditures also met expectations at 1.3%, a good reading in the eyes of Fed officials to go on and telegraph the hike of the Federal Funds Rate in December and beyond. We have University of Michigan Sentiment coming out at 10AM that may further solidify the positive reality and gains for the buck.
The Euro is trading in weak ranges, its lowest point against the dollar since July 20th following the much-expected European Central Bank meeting. President Mario Draghi carefully explained that the quantitative easing program would continue at a reduced monthly pace through September of next year in order to not risk the job creation and recovery of the Euro-zone economy.
The lack of will to tighten monetary policy on their end benefitted the dollar greatly as prospects of higher interest rates in the U.S. make the Euro a less desirable asset to hold onto, at least for the next year. There are still some downside risks to the U.S. dollar as it pertains to Euro, but all the factors that needed to come together to propel the dollar towards Q4 are manifesting themselves. Additionally, the Spanish independence battle of words with Catalunya continues without much progress, which is also a thorn for the shared currency at the moment.
The Pound has surrendered 2.3% of its value thus far in October, making it one of the worst performing currencies of the month as a result of Brexit uncertainty and success on the American theater. Companies in Britain are assessing the negotiations as problematic since key issues are still unresolved and a transition period has only been agreed upon as a concept verbally, but not defined. The lack of progress and no details on upcoming steps are only making it harder for business leaders to make decisions.
Furthermore, the fundamentals of the economy may have shown resilience since last year’s referendum, but the outlook for the next two years is worrisome. Sterling’s saving grace is the 88.6% probability of a hike by the Bank of England when they meet on November 2nd. Clearly, if the BOE backs away from taking this tightening action, the Pound will sink further.