Fundamental Analysis

Dollar Breaks 92 Level as Rivals Weaken; Pound Drops Below 1.33 as Wage Growth Disappoints

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During the European trading, the focus turned back to the economic calendar and specifically to the US PPI figures and the UK labor data, leaving geopolitical issues out of the spotlight for the moment. The dollar crossed above the 92-key level as risk appetite returned and developments on the US fiscal front, such as on tax reform, seemed to give reasons to investors to buy the dollar.

The dollar surged to 92.27 against its major rivals, ignoring the weaker-than-expected US PPI figures for the month of August. In particular, headline producer prices rose by 0.5 percentage points to 2.4% y/y (0.2% m/m), while the core equivalent increased by 0.2 percentage points to 2.0% (0.2% m/m). Expectations were for the headline index to increase by 2.5% y/y and the core index by 2.1%. However, the markets are eyeing tomorrow the US CPI numbers, which are also closely watched by the Fed, for more evidence on the future inflation path.

Dollar/yen touched a fresh two-week high of 110.45.

The pound could not extend its gains made during the Asian session as UK average earnings in July disappointed markets, growing below the inflation rate. Including bonuses, average earnings rose by 2.1% matching June's percentage increase, while forecasts were for a growth of 2.3%. The unemployment rate continued falling in August though, retreating from the 4.4% in July to a 42-year low of 4.3%. This is likely to bring a headache to BOE policymakers tomorrow when they meet to decide on interest rates as wages do not respond satisfactorily to better labor conditions.

In Strasbourg, Jean-Claude Junker, the President of the European Commission, called for EU governments to reap the benefits of closer EU integration now that the "window of opportunity" is still open. He also asked all members to join the common currency, saying that for the euro to be a symbol of unity "should be more than the currency of a select group of countries". Finally, he suggested the replacement of the bloc's bailout fund into a European Monetary Fund and the introduction of a new EU minister of Finance in an attempt to help weaker non-euro economies to adopt the currency and mitigate potential economic shocks.

In the meantime, Eurostat figures on Wednesday showed that industrial production in the Eurozone remained robust in July, growing from 2.8% y/y (upwardly revised from 2.6%) in June to 3.2% y/y despite missing the forecast of 3.4%. In another report, the agency indicated that employment change in the second quarter remained flat at 1.6% y/y (upwardly revised from 1.5%), exceeding expectations of a 1.4% growth.

Following the above, the euro showed little reaction, moving sideways around $1.1980, though afterwards, the pair fell to a one-week low of 1.1909 on the back of a stronger dollar.

The Energy Information Administration's weekly report on US crude inventories showed crude stocks rising by 5.9 million barrels in the week to September 8. This outstripped expectations for a rise by 3.2m barrels and came in above the 4.6m gain that was recorded in the preceding week. WTI gave up part of the gains that were made earlier in the day after the release of the report, though it was still trading 0.9% up on the day – at $48.67 a barrel – during afternoon European trading hours. In the meantime, Brent crude was 0.4% up, at $54.49 per barrel.

Following the EIA report, dollar/loonie approached a one-week high of 1.2209 before it slips to 1.2192 later on.

Regarding gold, the precious metal dropped to a two-week low of $1,323.26 per ounce as risk-on sentiment was back on track.

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