December Fed rate hike priced in but fundamentals favor euro
The U.S. dollar depreciated on Friday and touched a five-week low against major currencies. The U.S. Thanksgiving holiday truncated the week with European economic data outperforming U.S. indicators. The United States closed the week with disappointing purchasing manager index (PMI) estimates in the manufacturing and service sectors. European PMIs beat estimates and on Friday German confidence data rose more than forecasted. President Donald Trump will meet with Senate Republicans to discuss the vote on the Senate bill to be voted later in the week.
The euro was boosted by political news out of Germany. After German Chancellor Angela Merkel failed to reach a coalition with three other parties the head of Germany’s second largest party and partner in the grand coalition was seen relaxing his opposition to once again form a partnership with Merkel’s SDU. Earlier in the week the German leader had said that she preferred a new round of elections than a minority government.
Stability in German politics also boosted the pound. The British currency reached a 2 month high after the Brexit divorce is now more likely to be smoother than the original rhetoric from both sides. Prime Minister Theresa May still has to convince her own party and the EU that they will pick up the tab for the divorce if the UK wants to move onto trade negotiations.
Organization of the Petroleum Exporting Countries (OPEC) will meet in Vienna alongside Russia and the other major producers that have taken part in the production cut agreement. The deal is set to expire in March, but comments from both camps have hinted at a possible extension that could very well be announced at the end of the summit. The energy producers will meet on Thursday, Nov. 30.
Concerns about the future path of US interest rates has taken momentum out of the dollar. While the December interest rate hike is already priced in, softer fundamentals and a change in leadership at the central bank give little insight into next year. The growth of the U.S. economy will be front and center. The US Bureau of Economic Analysis will publish the second estimate of gross domestic product (GDP) on Wednesday, November 29 at 8:30 am EST.
The euro/U.S. dollar (EUR/USD) currency pair gained 1.03% this week. The single currency is trading at 1.1909 due to positive indicators and some headway into a new coalition in German politics. The pair was flat earlier in the week but the miss in US durable goods sales (–1.2 percent). The main event in the United States before the Thanksgiving holiday was the publication of the Federal Open Market Committee (FOMC) minutes from the November meeting. The market is already pricing in a rate hike in December, but further evidence of the internal debates regarding US inflation were expected. The minutes did not disappoint as there seems to be a strong contingent of Fed voting members who are concerned with weak inflation. That anxiety is not likely going to affect the coming rate hike, but will dampen the pace of rate hikes in 2018.
The Conference Board will release the US consumer confidence report on Tuesday, November 28 at 10:00 am EST. American consumers have remained optimistic about economic conditions, but sometimes that confidence has not correlated to increased spending. US preliminary quarterly GDP will be published on Wednesday, November 29 at 8:30 am EST. Economists are forecasting a 3.3 percent gain in a refinement on the first estimate. Manufacturing PMI data will be published by the Institute for Supply Management on Friday, December 1, at 10:00 EST with the disappointing advanced manufacturing PMI data from Markit on manufacturing posted earlier today, investors will be closely following the release.
The USD/CAD lost 0.46% in the last five trading days. The currency pair is trading at 1.2711 as the softness of the US dollar combined with higher oil prices. Weak Canadian retail prices on Thursday were not enough to stop the loonie rally. Sales rose less than expected in September despite gas prices rising. Vehicle and clothing purchases declined validating the caution expressed by the Bank of Canada (BoC) of late. The central bank hiked twice in 2017 putting the Canadian benchmark rate at 1.00 percent, but with concerns about NAFTA, economic growth slowing down are enough to keep the BoC in the sidelines until next year.
The week begining Friday, Dec. 1, will be a busy week for CAD traders. Statistics Canada will release the monthly GDP figures as well as the employment report both at 8:30 am EST. GDP is expected to have shrunk by 0.1% and there is some anxiety on the job front as the first ADP job report for Canada showed a loss of 5,700 in October.