USD has been strongly on the front foot in recent trade; DXY has smashed above its 50dma at 93.26 and surged to the 93.50 mark in recent trade amid an increasingly risk off feel to trade today.
In terms of the catalyst for the move; US House Speaker Nancy Pelosi was out with some comments on the state of US fiscal stimulus talks shortly after 1330BST/0830EDT; US President Trump’s offer on a Covid-19 stimulus package falls significantly short, she said in a letter to lawmakers. Moreover, significant changes mush be made to Trump’s proposal on relief if there is to be a deal, though she remains hopeful a deal can eventually be reached, Pelosi said.
In other words, the odds of markets getting the pre-election fiscal stimulus they so desire is rapidly sliding; given that there are only about three weeks now until voting day, even if a deal was agreed upon today, it would have to get through Congress at unprecedented speeds.
Naturally then, markets increasingly coming to the realisation that we might not be seeing any stimulus in the US until 2021 (by which point the economic recovery would have continued to rapidly stagnate), we have seen some risk on flows.
Perhaps contributing to USD upside was relatively strong CPI numbers. Core CPI in the US grew at an annualised rate of 1.7% in September, admittedly a little lower than expectations for 1.8%, but contrast Core CPI with other G10 economies; today’s numbers highlight the fact that if any G10 country is going to get inflation back to target over the next few years, it is most likely to be the US.
Might this (looking WAY down the line) translate into a comparatively hawkish FOMC? That is probably a stretch given we are still very early in the recovery, but as the US economy increasingly positions itself as an outperformer amongst the G10, this is surely a positive theme for USD.
Other factors outside of the US are likely also contributing to USD strength; EU data this morning (German ZEW for October) painted a pessimistic picture for Eurozone economic performance so far this month. Meanwhile, UK labour market data was softer than expected and the tone of developments on the Brexit front are yet to point towards a deal getting any closer, while the UK’s threat to walk away from talks on October the 15th (Thursday) appears to still be on the table. GBP and EUR are thus suffering, alongside AUD which is being weighed by fears that China might be blocking coal imports.
In terms of what’s next for USD; a failure to get any fiscal stimulus over the line before the November 3rd election might keep risk assets on the defensive, which ought to be positive for USD. But as long as Biden maintains his solid +10% lead in national polling, which ought to maintain the consensus that there will be a Democratic “blue sweep”, markets will continue to forecast BIG stimulus to come in January, which ought to keep any risk asset downside in check for now.
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