The U.S. Dollar was able to hold on to nearly all of its gains from yesterday and extended those advances versus the British pound.
The greenback rallied across the board yesterday as new Fed Chairman Jay Powell testified before Congress. Markets took Powell’s testimony as slightly more hawkish than his predecessor. As such, interest rate expectations ticked higher and took the greenback with it. However, the prospect of higher interest rates caused U.S. stocks to sell-off and the risk-off sentiment continued across the globe with European equities slumping.
This morning’s economic data should help the greenback hold on to its gains. The revision of fourth quarter GDP showed that the world’s largest economy grew 2.5%, down from a previous reading of 2.6%. However, the print came right in line with expectations. Personal consumption registered at 3.8%, the same as the first print but beat expectations of a downward revision to 3.6%. As Powell stated yesterday, the U.S. economy is strong and will merit interest rate hikes over the course of the year. Fed Fund Futures show a 100% chance of a rate hike next month.
The Euro fell to a three-week low against the U.S. dollar overnight before recovering slightly. The common currency was the victim of widespread U.S. dollar strength. Earlier this week we saw the release of soft German inflation data but today’s reading is more problematic for the Euro. Eurozone CPI eased 1.2% in February, down from 1.3% in the month prior. Low inflation will allow the European Central Bank to keep interest rates at a record low. While the ECB is slated to end its quantative easing program later this year, today’s reading still spells trouble for the common currency. Low inflation in the EU and hawkish comments from the U.S. Fed equaled a perfect storm for Euro weakness. The common currency is down one cent since yesterday morning.
The British pound has been the biggest loser overnight; extending its decline from yesterday after the European Union published a draft Brexit treaty. Prime Minister Theresa May is preparing to reject the draft, according to a senior official. It may feel like Grounhog day but political headlines continue to drive the direction of the sterling. It has been almost a year since May triggered the U.K.’s withdrawal, but talks have yet to begin on what kind of trade accord will follow.
Fundamental data has not helped the sterling as a report showed a slight deterioration in business and consumer confidence in February.