A New Lease of Life for the USD, with GDP Numbers in Focus

Earlier in the Day:

Macroeconomic data through the Asian session this morning included inflation figures out of Japan and wholesale inflation numbers out of Australia.

Japan’s inflation figures showed little sign of a move towards the BoJ’s objective, with core inflation unchanged at 0.7% in September, supporting the view that the BoJ is unlikely to shift on monetary policy anytime soon, with manufacturing costs yet to be passed on to the consumer amidst a rising price pressure environment.

The Yen showed little response to the figures down 0.14% to ¥114.14 against the Dollar, largely driven by a rebound in the Dollar through the U.S session on Thursday.

For the Aussie Dollar, it was another dark day, with September’s producer price index numbers coming in softer than the previous month and below forecasts, pulling the Aussie Dollar down from $0.76508 to $0.7649 upon release of the figures, with the figures providing little hope of a build-up in price pressure.

At the time of the report, the Aussie Dollar was down 0.22% at $0.7643, managing to recover from an intraday low $0.7626, which came in response to news hitting the wires of the Australian high court ruling that Deputy Prime Minister Joyce and four other are ineligible to retain office due to his dual citizenship status. It’s not been a great week for the Aussie bulls with the Aussie down 2.24% in the current week, though the RBA may be somewhat reliever and perhaps hoping for a continued decline in the coming weeks.

Across the Asian majors, the Nikkei continued with the Nikkei closing out the day with a 1.24% gain, Wednesday having been the only blemish over the last 19 sessions, with the Hang Seng and the CSI also in the black, whilst the ASX200 languished in the red in the wake of the high court ruling, the index giving up gains from earlier in the day as the markets responded to the news. The loss of Joyce ultimately means one less seat for the coalition government.

The Day Ahead:

With no material stats scheduled for release out of the Eurozone, the markets will be left to continue to lick its wounds from the slump in the EUR on Thursday, which came in response to the ECB’s plans for the asset purchasing program next year.

The markets certainly took the recalibration, as the ECB President called it, to be on the dovish side, with Draghi leaving the door open should there be a need to ramp up purchases next year, whilst looking to hold rates unchanged until the conclusion of the program.

As the FED looks ahead to a final rate hike for the year and, with the Eurozone’s recovery considered to be trailing that of the U.S, yield differentials will likely favour the U.S Dollar over the near-term, particularly if tax reforms get rolled out, which will be considered a victory for the ECB in managing to peg back the EUR whilst making a move towards policy normalization.

At the time of writing, the EUR was down 0.09% to $1.1640.

Things are not much better for the Pound following Thursday’s slump, and it’s unlikely to get much better today with a lack of stats to provide support. Brexit continues to be the key driver and news of the EU preparing for a “no deal” event has not gone down too well, removing the EU Brexit Summit optimism that had provided support at the end of last week.

At the time of the report, the Pound was down a further 0.23% to $1.3131, the declines coming in spite of the more than 80% probability of a November rate hike being priced in.

It’s likely to be another eventful day across the Pond, with key stats scheduled for release out of the U.S this afternoon including 1^st estimate, 3^rd quarter GDP figures together with finalized October consumer sentiment numbers.

As has been the case through the week, we will expect the numbers to have some influence on the Dollar, though there will need to be a divergence from expectations for any material moves as focus remains on who will be the next FED Chair and of course, progress on tax reforms.

The House of Representatives passing of the budget resolution on Thursday raised the prospects of tax reforms further, despite some members of the Republican Party going against. Key to the budget is allowing the Senate to pass tax reforms through with a simple majority as opposed to the normal 60 vote majority and that’s likely to be considered the game changer.

At the time of writing, the Dollar Spot Index was up 0.20% to 94.801, with weakness in both the EUR and the Pound contributing to the new found lease of life in the Dollar.