Dollar steadies as Fed prepares to tighten money supply

Stagflation is not a word that gets bandied about often but it is right now. The global economy is struggling to gather momentum in its post covid recovery and the supply chain problems persist. However, as inflation is a year-on-year measure and 2020 was a godawful year in so many ways, we are seeing consumer and producer price inflation at the same time as this growth stagnation. Hence stagflation.

The usual move for investors would be to buy the USD and US treasuries and we are seeing some of that. However, the Chairman of the US Federal Reserve has made it pretty clear that the Fed will slow its bond-buying in November and that has added a modicum of confusion.

So the US Dollar is up and down like a clown’s bicycle because investors are in and out of the US Dollar like a trombonist’s elbow. GBPUSD has lost three cents this week and is down to $1.3440 this morning despite better-than-expected UK economic growth data.

UK GDP much better than forecast

UK GDP growth for Q2 was revised up to 5.5% in figures released this morning, bringing annualised growth up to 23.6%. That data was much better than forecast but the ongoing fuel problems in the UK have stopped the Pound from gaining. That is odd because the business investment was up 4.5% in Q2. The only slightly bad news overnight was the fact that UK house prices slowed a little to just 10% inflation in the year to September.

Also released overnight was Japanese industrial production data – a very disappointing 3.2% contraction in August, and Japanese retail sales which contracted 3.2% in the year to August. AS you can imagine, the Yen is on the back foot and GBPJPY is back above JPY 150 despite the Pound’s problems.

The data releases came thick and fast overnight. They included a negative manufacturing PMI from China alongside a better service sector one and the Caixin manufacturing index was 50; an indication of neither growth nor contraction.

We also saw a very positive Australian building approvals report. A 6.8% rise in the number of approvals in August was much better than forecast and the first positive reading since May. The GBPAUD rate is back down to AUD 1.8630 as Sterling struggles.

The morning ahead brings German employment data and the same data for the Eurozone as a whole. There will also be a couple of ECB speakers. So the Euro could have a lively day. GBPEUR is pretty flat just below €1.16 after Monday’s dramatic drop. Maybe, once the strong UK GDP data sinks in, and assuming we don’t see more fights on petrol forecourts, we may see some GBP strength.

This afternoon brings us US GDP data, which is forecast to be around 6.6% for Q2. As long as the forecasts prove to be fairly accurate and the weekly jobless claims data is not too far out of whack, the focus for USD traders will be on the second day of Jerome Powell’s testimony to the Joint Economic Committee, in Washington. Chairman Powell’s responses to questions are apt to create volatility, especially as we are all on tenterhooks over the Fed’s bond-buying plans. So be ready for the USD to flap about a bit (It is a technical term).

CAD much stronger on commodity gains

The currency I haven’t mentioned this week is the Canadian Dollar, which has been sneakily strengthening against the Pound. GBPCAD is 1.7080 this morning; down from the CAD 1.7390 we saw at the start of the week. Higher commodity prices and increasing US demand are in play here but China’s poor overnight data may stall this CAD rally as their demand for raw materials is a strong driver in the commodities markets.

And it is the last day of the month and the quarter, so, as mentioned yesterday, expect the unexpected as traders close positions and take profit.

It is also International ‘Ask a stupid question day’. So here goes, when they translate Gaelic names into English, why are they spelt wrong?

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