The prevailing risk-on mood ahead of key risk events in the next few days lifted the US dollar and weakened the yen in European trading on Wednesday. Upbeat economic data also boosted the greenback along with the British pound. The aussie and kiwi were other notable gainers, while the euro joined the yen in being the day’s worst performers.
Manufacturing PMI out of the UK was the main data release in Europe. The index rose from an upwardly revised 56.0 in September to 56.3 in October, beating expectations of a fall to 55.8. The solid data reinforced expectations that the Bank of England will raise rates on Thursday, especially as, apart from stronger manufacturing growth, the IHS Markit report showed input and output prices also accelerated in October.
The pound extended its gains, climbing to a near three-week high of $1.3319 before settling around $1.3290 in late European trading. It was also up sharply against the euro, rising to a 4½-month high of 0.8730 pounds per euro. Reports that the European Union is ready to intensify the Brexit talks with the UK had lifted the pound earlier in the day, but the British currency remains vulnerable to downside moves if the Bank of England decides against raising rates when it concludes its two-day monetary policy meeting tomorrow or delivers a dovish hike.
Prior to the BoE’s decision tomorrow the Fed will announce the outcome of its policy meeting at 18:00 GMT. The Fed is expected to keep rates unchanged despite growing signs that the US economy is gaining momentum, as it waits for inflation to recover from a soft patch. However, the FOMC statement will likely signal a December rate hike, although the event has been overshadowed by the highly anticipated choice of the next Fed chair. President Trump is due to reveal tomorrow his nominee to replace Janet Yellen when her term expires in December.
Another major dollar event tomorrow is the unveiling of the tax bill by House Republicans, while the ongoing investigation into Russian collusion with the Trump election campaign team poses a threat to the current risk-on sentiment following the first charges being filed this week against three of Trump’s former aides.
In the meantime though, the dollar advanced higher on the back of more positive indicators out of the US. The ADP report on private-sector employment showed 235k jobs were added last month as US employers hired more workers after the disruption from the hurricanes in September. This compares with a downwardly revised figure of 110k in the prior month and forecasts of 200k. The strong number comes ahead of Friday’s official nonfarm payrolls report.
The greenback hit a session high of 114.27 against the yen after the data but fell back towards the 114 level after the ISM manufacturing PMI missed expectations. The ISM’s manufacturing gauge had hit a 13-year high of 60.8 in September but slipped to 58.7 in October, coming in below forecasts of 59.5. In contrast, the Markit manufacturing PMI improved during the month, rising from 53.1 to 54.6 in October’s final reading.
In other currencies, the euro struggled for direction, falling against most of its major peers. The single currency was last trading at 1.1633 versus the dollar and at 132.65 versus the yen.
The Australian and New Zealand dollars held their ground against the resurgent greenback, with the aussie extending its gains to $0.7691, but the kiwi eased slightly from its earlier highs to around $0.6900. The Canadian dollar was flat, finding some support from surging oil prices after yesterday’s surprise drop in Canadian GDP during August further dented expectations of additional rate hikes by the Bank of Canada in the near term. Dollar/loonie last stood at C$1.2877, not far from last week’s 3½-month high of C$1.2916.
Crude oil prices enjoyed another day of gains, reaching fresh highs, boosted by strong compliance by OPEC members in October to the output deal. WTI crude hit a 10-month high of $55.22 a barrel, while Brent crude scaled a more than two-year high of $61.70 per barrel. There was little reaction to the latest US inventories data.
The EIA’s weekly report showed a bigger-than-expected drawdown of 2.435 million barrels of crude stocks. Gasoline stocks also fell by more than forecast but distillate stocks dropped by less than expected.
Gold prices rebounded sharply today to briefly top the $1280 level amid some investor caution ahead of tomorrow’s announcement on the new Fed chair. The precious metal was last trading 0.5% up on the day at $1277 an ounce. Other metals also performed well, with copper jumping 1.1% to $3.1265 a ton on hopes of higher Chinese demand, and nickel prices soared to a two-year high to break above $13,000 a ton, driven by rising demand for lithium batteries used in electric cars (of which nickel is a key component).
