The U.S. Dollar has hit the brakes a bit against most counterparts, but today it has improved the most against the Pound.
Today is busy day with the decision by the Bank of England to hike welcoming us this morning and tax reform legislation as well as the announcement of a new head of the Federal Reserve slated for later.
Jerome Powell will be the chairperson after Yellen exits in February. Although the BOE made their move, Sterling depreciated by 1.0% after a very clear message from Governor Mark Carney that the BOE will continue to aid the economy and that this hike was not the start of a new trend of tightening.
Initial Jobless Claims declined which only helped to strengthen the view of the labor sector and sustains the greenback at current levels. We have the employment Situation scheduled for tomorrow as well as a gauge of service sector growth and factory orders. Any positivity here will only propel the dollar and we do expect an expansion of jobs and wage growth.
Although the U.S. Dollar is riding on the wave of good economic indicators, the Euro also merits credit for continued improvement in most aspects and nations. Markit Eurozone Purchasing Managers Index registered an expansion reading of 58.5, almost meeting the expected 58.6 only as a result of slightly lower than estimated numbers in France.
Recently though, France has not been a cause for concern and the progress seen in Spain and Italy, previously problematic countries, far outweigh expectations not being met elsewhere. Additionally, German indicators also thrived.
Momentum has not been on the side of the shared currency, but it is important to remember that dollar rallies against the currency have been short-lived and for good reason: the Euro-zone economy is in solid shape and political risks remain mostly subdued.
The Bank of England did not surprise anyone with its decision to increase its benchmark interest rate for the first time in a decade, but the Pound fell after Carney’s dovish commentary. A 25-basis-points hike was announced, ending the run of record-low rates in Britain in order to combat high inflationary growth that has been the main symptom since the Brexit result. This means that the hike was a measure considered appropriate only because of the circumstances and not a signal that the economy can indeed handle higher borrowing costs.
Although fundamentals of the UK economy have shown resilience in the face of very pessimistic outlooks, the uncertainty over the separation for the EU has weighed on the economy and the lack of wage growth in keeping up pace with inflation is worrisome. Nevertheless, the BOE feels it is important to maintain an accommodative stance to precisely fend off any downside risks to the economy since the future is unclear as Britain enters a new commercial trade reality.