Dollar Turns Its Sights To Fed Speakers, Pound Tumbles

• Euro unable to sustain Italy-related gains, as ECB President Draghi struck a more cautious tone amid weakening data
• Dollar exploits euro’s softness, advancing nearly across the board; today all eyes will turn to a speech by Fed Vice Chair Clarida at 1330 GMT
• US stocks rebound, but “hawkish” Trump remarks on trade temper optimism
• Pound tumbles as markets digest Parliament will likely vote against Brexit deal
• Euro lifted by Italian optimism, but ECB drags it back down

The common currency drifted higher early on Monday after reports the Italian government will consider lowering its budget deficit target for 2019. Euro/dollar climbed to 1.1385 from 1.1330 but soon gave back those gains to trade even lower, after ECB President Draghi and Chief Economist Praet struck a cautious tone with respect to policy. While both made it clear the Bank remains committed to ending its QE program, they acknowledged the loss of momentum in growth and rising protectionism risks, implicitly signaling that a continuation of this trend may delay their normalization plans.

Indeed, the bar to extend QE purchases beyond their current end-date is probably high, not least due to technical issues pertaining to a scarcity of eligible bonds from core economies, as well as credibility concerns. That said, if key indicators soften further, policymakers would probably shift to a more cautious bias with regards to future hikes; concerns around this are likely among the key reasons behind the euro’s recent underperformance. Focus now turns to Friday’s preliminary inflation figures, one of the last pieces of tier-one data before the ECB’s December 13 meeting.

Dollar bolstered by euro softness, turns its sights to Fed speakers

The dollar outperformed all its major peers besides the kiwi yesterday, drawing strength mainly from weakness in the euro as opposed to anything US-related. It’s going to be a busy week for the greenback, as the calendar is packed with Fed speakers, US data, and the latest FOMC minutes due on Thursday. The past few weeks have seen a notable repricing of Fed rate-hike expectations and while investors still appear convinced the Fed will hike again in December, doubts have grown about the number of hikes in 2019. Markets are only pricing in a little more than one rate increase in 2019, after the one in December. This is a long way off from the three hikes the Fed itself has penciled in for that year.

In this context, this week’s events may be instrumental in shaping rate expectations and hence, in determining the dollar’s near-term performance. These events will kick off today with a speech by Fed Vice Chair Clarida at 1330 GMT, where investors will try to decipher whether the recent rate repricing was justified, or perhaps a little overdone. Regional Fed Presidents Evans, Bostic, and George will also participate in a panel discussion at 1930 GMT.

Yen crumbles, stocks rebound as risk appetite recovers

Risk sentiment bounced back on “Cyber Monday”, with major US equity indices like the S&P 500 closing 1.55% higher, while defensive assets such as the Japanese yen fell across the board. There was no fresh catalyst behind this shift, which may have been fueled by hopes for a US-China trade “ceasefire” or expectations for a more dovish-sounding narrative by Fed officials this week, or both.

It wasn’t meant to last though, as remarks from President Trump hit the wires after US markets closed, indicating he still intends to slap tariffs on all Chinese imports if the talks with China’s President fail to bear fruit. Sentiment turned around, albeit only a little, with US equity futures pointing to a slightly lower open today and the yen ticking higher. The relatively subdued reaction suggests markets interpreted Trump’s hawkishness as simply another negotiating ploy aimed at generating leverage; investors by and large still seem to anticipate some form of “truce” this week.

Pound crawls lower despite quiet Brexit front

The British pound is the worst performer early on Tuesday, even though there haven’t been any major developments in the Brexit saga. Traders seem increasingly jittery that the UK Parliament will reject the Brexit deal on December 11, positioning themselves accordingly.

While PM May doesn’t appear to command the numbers to push the deal through, her recent pitch has shifted to a “this deal, or no deal at all” approach, perhaps in an attempt to sway moderate lawmakers. Sterling could remain under pressure ahead of the vote as uncertainty grows, with any rebounds likely to remain short-lived. That said, with investors increasingly pricing in a rejection, anything that alters this narrative going forward could see the pound explode higher, particularly since speculative positioning in sterling remains heavily net-short.