Dollar hits one-month low on US stimulus hopes
The dollar has sold-off violently against high risk currencies in the past 24 hours after comments from President
Trump raised the chances of fresh US fiscal stimulus being forced through before November’s election.
One of the main beneficiaries of the move lower in the greenback has been the euro, which has leapt over one
percent higher so far this week to its strongest position in a month. This has come after Trump stated that he
was willing to accept a large aid bill, despite opposition within his own Republican Party. This means that he is
now pushing for a deal greater than the $2.2 trillion package initially proposed – something that the Democrats
have been championing for a number of weeks.
With a little over two weeks to go until the US election, and with Trump currently trailing well behind in the
latest opinion polls (around 10 points), it appears likely that the President will try and force the deal through as
quickly as possible in order to appease undecided voters. House Speaker Pelosi has stated that she was
hopeful a deal can be struck before 3rd November, although there clearly remains doubt among investors,
which has held back risk currencies from posting even larger gains.
Somewhat counterintuititvely, the prospect of more fiscal spending in the US is weighing on the safe-haven
dollar and supporting just about every other currency, buoyed by the improvement in risk sentiment. Whether
this trend continues will depend on a number of factors in our view, namely whether Trump’s spending
timetable is realistic, the latest election polls and the COVID situation in Europe that continues to deteriorate
on an almost daily basis.
Pound jumps after Barnier raises hopes of last-minute Brexit deal
Meanwhile in the UK, sterling traders have largely overlooked the latest developments in the US in favour of
news out of the Brexit negotiations. The pound spent much of yesterday largely rangebound, although rose
sharply this morning versus the dollar following some encouraing comments from EU
chief negotiator Michel Barnier. Barnier noted ‘an agreement is within reach if both sides are willing to work
constructively, compromise and working to make progress on the basis of legal texts and if we are able in the
coming days to resolve the sticking points’.
Both sides appear to be playing a game of chicken, waiting for the other to blink and accept a comprimise on
key aspects of the deal. While a last-minute agreement remains far from guarenteed, the market appears to
have heard enough to believe that an eleventh hour deal is more likely than not to be struck, hence the sharp
move higher we’ve seen in the pound.
This morning’s UK inflation data was almost bang on expectations. Investors will instead be looking towards
comments from BoE MPC members Ramsden, Haldane and Bailey in the next couple of days, along with any
developements on the Brexit front.