Fundamental Analysis

Pound Rises on GDP, Hike Speculation; Loonie Declines on BoC Inflation Expectations


The British pound was a notable gainer during today's trading as forex market participants revised upwards their expectations for a quarter percentage point interest rate rise to be delivered by the Bank of England after UK third quarter growth beat expectations. The dollar was gaining ground relative to the loonie, aussie and the kiwi and retreating versus the euro, yen and of course sterling.

At 1542 GMT, the dollar index, which gauges the greenback against the currencies of six major US trading partners, was 0.1% down relative to where it closed yesterday, though not far below the near three-week high that was recorded a couple of days ago. Versus the yen, the dollar was lower by 0.2%, having earlier hit 114.24 yen, its highest since July 11.

Speculation over who's going to be the next Fed chief is mounting (with a Yellen reappointment also a possibility). According to a report by Bloomberg, Trump asked Republican senators at a closed-door lunch on their preference and it was said that Stanford University economist John Taylor emerged as the number-one pick. This has supported the dollar as Taylor is viewed as an inflation hawk, favoring higher interest rates.

September durable goods orders out of the US grew by 2.2% m/m, handily beating expectations of a rise by 1.0%. Core durable goods (which exclude volatile transportation items) over the same month increased by 0.7%, above forecasts of 0.5%. The positive numbers pushed the dollar higher relative to major counterparts including the yen, spurring hopes for a lesser drag on economic activity from the hurricanes that stormed the US in September. The world's largest economy will see the release of Q3 preliminary GDP estimates on Friday.

Later in the day, US September new home sales grew by a whopping 18.9% m/m, reaching a near 10-year high and coming in far above the expected contraction of 0.9% and August's fall of 3.6%. The dollar index advanced within the first minutes of the data release.

According to preliminary estimates, UK GDP grew by 0.4% q/q in the third quarter, above expectations of 0.3% which also coincided with Q2's growth figure. Year-on-year, growth stood at 1.5%, above forecasts of 1.4% and at the same pace as Q2's annual expansion. The stronger-than-anticipated figures pushed sterling higher as expectations that the BoE will hike interest rates upon completion of its meeting on monetary policy on Thursday were on the rise. Pound/dollar was last up 0.8% on the day, having hit an eight-day high of 1.3270 at its peak, with euro/pound being down by 0.4%, recording an eight-day low of 0.8877 earlier in the day.

The Canadian dollar hit a three-month low as dollar/loonie rose to as high as 1.2788 after the Bank of Canada decided to maintain rates at 1.00% upon completion of its policy meeting today. The decision was expected but the central bank's policymakers pushed forward to the second half of 2018 their expectations for inflation to reach the bank's 2% target. Dollar/loonie was last 0.9% up, trading close to the aforementioned high.

Euro/dollar last traded 0.5% up on the day and above the 1.18 handle. The ECB's decision tomorrow on how it will adjust its asset purchase program starting next year is eagerly awaited by market participants. Economists expect a 20-billion-euros-per-month reduction (to 40 billion euros per month). Uncertainty over the program's duration will also clear out tomorrow with reports saying policymakers are split over whether it should last for six or nine months.

The aussie remained significantly down on the day relative to its US counterpart after today's third quarter inflation figures surprised to the downside, scaling back expectations for an interest rate rise to be delivered anytime soon by the RBA. Aussie/dollar was last down 0.9%, having earlier fallen to 0.7696, its lowest since July 13.

Kiwi/dollar remained on a downward path on uncertainty over the economic policies of the new Labour-led government. The pair was 0.3% down, trading near its daily low of 0.6865 which is the lowest the pair has experienced since May 16.

In commodities, gold was 0.05% lower, trading just below $1,275 an ounce. WTI was 0.25% lower at $52.34 per barrel and Brent crude traded 0.4% higher at $58.58. The Energy Information Administration's (EIA) weekly report showed US crude stocks rising by 0.86 million barrels during the previous week. Expectations were for a fall by 2.58 million barrels.
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