Fundamental Analysis

Dollar Ignores North Korean Missile, Pound Rallies On Reports Of Brexit Bill Agreement

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The pound rallied on foreign exchange markets on reports that the UK and the EU had agreed on a Brexit bill while the US dollar and risk sentiment more generally were helped by the passage of the Republican tax cut package through a Senate committee. These developments helped markets shake off worries about a new missile test from North Korea.

The North Korean military tested a new type of missile which flew higher than any other previous projectiles launched by the country. North Korea said its ballistic missile could hit any part of the United States; a claim which could not be completely verified as the missile was not carrying a regular payload. Markets were relatively unfazed by the news, since many times in the recent past, any North Korean-related selloff quickly reversed itself.

Therefore dollar/yen remained relatively quiet as risk sentiment was also positive following a big rally on Wall Street overnight. Asian stock markets were also mostly positive. Dollar/yen was last trading at 111.45.

The euro staged a modest recovery from the previous day’s lows as it climbed back to 1.1870. The dollar was upbeat yesterday as Republicans managed to pass their tax cut package from a key Senate committee, a move that sets up the stage for a vote on the package soon – possibly as soon as Thursday.

In other news, the President’s nominee for the post of Fed Chair, Jerome Powell said that the case for a December rate hike was “coming together”, in yet another sign that the Fed will most likely raise rates in its next meeting.

Despite the dollar-positive news, the pound strengthened to a 2-month high against the greenback, breaking through the 1.34 level, as reports came in that the EU and the UK were close to a deal on the so-called ‘divorce bill’. The figure was in the range of 40-50 billion pounds but the reports of the agreement were not verified by officials. An agreement on the Brexit bill could unlock the next stage of the negotiations, which would relate to the trade relationship that the UK would have with the EU after it leaves the block. Euro/pound fell to around 0.8845 on the news. Nevertheless, the thorny issue of the type of border Ireland and Northern Ireland would have post-Brexit remains as a potential sticking point before negotiations on trade start.

Looking ahead to the remainder of the day, German flash inflation for November will be the only newsworthy item out of Europe, before an action-packed US session begins. Early in the US session, the 2nd estimate of third-quarter growth for the world’s largest economy will come out, which is expected to show an upward revision to 3.2% annualized from 3% initially reported. Pending home sales and crude oil inventories are some of the other statistics expected. Although markets are focusing more and more on what Fed Chair nominee Jerome Powell has to say, they will also be keenly interested in Yellen’s congressional testimony about the economy today. Later in the day, John Williams of the San Francisco Fed will also speak about the economy and the Fed’s Beige Book of regional economic conditions will come out.

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