Fundamental Analysis

Dollar Pulls Back as Trump Opposes Senate Healthcare Deal; Pound Down as Real Wages Disappoint

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While China was in the spotlight during the day, with the Chinese President Xi Jinping opening the country's biggest political event, the Communist Party Congress, in the US, President Trump showed opposition to the bipartisan healthcare deal, driving the dollar lower. The pound also weakened after employment data showed that UK real wages remain negative.

The dollar index stalled its uptick driven mainly by speculations that Trump will replace the Fed chair with a hawkish candidate in February, retreating to 93.53 but remaining 0.10% up on the day after Trump twitted on social media on Wednesday that he "can never support" the healthcare deal mutually agreed by both parties this week. Senators from both parties said earlier they had reached a backup deal to maintain Obamacare as a law for at least two years and hence continue subsidizing insurers.

A positive contribution to the dollar during the day was also a vital progress in tax legislation on Monday when a number of US Republicans showed willingness to vote on a budget resolution on Thursday which, if supported, would allow Republicans to use a legislative tool known as reconciliation and eventually pass tax reforms through the Senate without support from the Democrats. If this fails, then Republicans would have to raise 60 votes in the Senate from the current majority of 52.

In terms of data, US housing data appeared weaker than expected in the face of hurricanes. Building permits decreased by 4.5% m/m in September to a one-year low of 1.215 million units after rising by 3.4% in August, while analysts projected a smaller contraction of 2.9%. The reduction in new constructions underway was larger than the forecast of 0.5% m/m at -4.7% compared to -0.2% seen previously (revised downwards from -0.8%).

Against the yen, the dollar managed to climb to a two-week high of 113 before helped by comments made by the BOJ board member Makoto Sakurai early on Wednesday which advised the central bank to stick to its current ultra-easy monetary policy as the effects from the policy would become stronger over time.

In the UK, the Office for National Statistics published mixed employment data. The number of unemployed people rose by 1,700 in September after declining by 200 in the previous month, while projections were for a rise of 1,000. The unemployment rate, though, remained flat at 4.3% (a 42-year low) as expected in August with average earnings (three-month weekly average) including bonuses growing a shade above expectations at July's rate of 2.2% y/y. Following the figures, the pound posted short-lived gains, as traders, giving a second look at the data, noticed that wage growth was lagging inflation which edged up to 3.0% y/y in September. Besides that, markets had doubts whether MPC members would proceed with a rate hike in November after BOE policymakers, including BOE chief Mark Carney, made some dovish-perceived remarks before the parliament's Treasury Select Committee. Tomorrow, the British Prime Minister Theresa May will give a pitch to EU leaders on the first day of the EU summit in Brussels which concludes on Friday, while data on UK retail sales will be also in focus.

In Spain, the Spanish Prime Minister, Mariano Rajoy, who holds an absolute majority in Spain's Upper House, suggested the Catalan leader, Charles Puigdemont, "acts sensibly" and step back from independence, avoiding the implementation of the direct rule by Madrid. Puigdemont has a last chance on Thursday to back down from his position on independence.

Meanwhile, the ECB chief, Mario Draghi, speaking in Frankfurt said that lower interest rates give room for further reforms and therefore the current accommodative monetary policy provides the opportunity to take these measures. The euro remained flat against the dollar at $1.1761.

Turning to commodities, gold slipped to a 1 ½-week low of $1,276.84 per ounce but managed to rise to $1,280 afterwards. Oil prices drifted lower following a mixed EIA inventory report. US crude inventories dropped by 5.531 million barrels in the week ending October 11, while forecasts were for a fall of 4.242 million. This was also larger than the previous contraction of 2.747 million. On the other hand, gasoline inventories rose by 0.908 million versus an increase of 0.256 million expected and 2.490 million seen previously. WTI and Brent crude pulled back from intra-day highs, falling to $52.15 and $58.33 per barrel.

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