Dollar firms as its peers struggle; pound slips as MPs fail to reach Brexit consensus

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XM Market Review
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  • US dollar continues to inch higher despite falling yields as more central banks join dovish bandwagon
  • Pound comes under pressure after indicative votes produce no majority for any option and May’s offer to quit fails to win enough support for her deal
  • Kiwi and aussie rebound from lows but euro extends declines

Dollar defies lower US yields as other government bond yields fall more

The US currency rose to fresh two-week highs on Thursday, with the dollar index approaching the 97.0 level. Support for the dollar comes even as the yields on US Treasuries continue to drop, with the yield on 10-year notes reaching a 15-month low of 2.34% and deepening the negative spread with the 3-month note.

The inverted yield curve that took shape last week has triggered fears of a US and global recession, pushing more central banks to turn dovish. The RBNZ adopted an easing bias at its policy meeting this week, while persisting weakness in the Eurozone has driven German bund yields back to negative territory.

As long as this trend continues, the greenback is unlikely to weaken significantly as US yields still look relatively attractive among the major advanced economies even after the recent slump. Dollar strength hasn’t been so pronounced against the safe-haven yen however, with dollar/yen moving back towards last week’s 6-week lows and flirting with the 110 handle again.

Aussie and kiwi attempt rebound

The battered Australian and New Zealand dollars were attempting to recover from yesterday’s dramatic sell-off, particularly the kiwi, which slumped by 1.6%. The response was triggered from an unexpected dovish tilt by New Zealand’s central bank, which said a rate cut was the more likely next move of its official cash rate. Investors now anticipate the Reserve Bank of Australia, which meets next week, to also switch to a more dovish stance. The aussie was struggling as a result and last stood at $0.7085, after losing its grip above the $0.71 level yesterday.

Things are not looking good for the euro either, as worries persist about the health of the Eurozone economy. The single currency got a modest but short-lived boost yesterday after ECB President Mario Draghi yesterday expressed confidence about the resilience of the domestic economy. However, in later remarks, Draghi suggested that the timing of a rate hike could be pushed further back, sending the euro to a 2½-week low of $1.1231.

Traders will be watching the Eurozone economic sentiment index due at 10:00 GMT, hoping to see signs of an easing in the slowdown.

Pound breaks below recent range as Brexit remains deadlocked

The indicative votes held in the British Parliament on Wednesday failed to produce a clear path for a way forward in the Brexit process. MPs voted on eight different options, but none achieved a majority, though the proposal for a customs union and a second referendum did obtain the most votes. A second round of votes will likely be held next Monday so it’s still possible that a majority can be reached for at least one of the options as the least popular alternatives are eliminated.

But traders were unhappy with the ongoing uncertainty, which seems set to drag on further, and the pound broke below the bottom of its 3-day trading range at $1.3155 to hit a low of $1.3123.

Also weighing on sterling was the statement from the DUP party, the small Northern Irish party that prop-up May’s government, that they are still opposed to the Prime Minister’s Brexit deal. The pound touched a one-week high of $1.3269 yesterday after some key Eurosceptic figures in May’s Conservative party said they are willing to back the deal if the DUP was to support it. But the DUP’s opposition means a third meaningful vote on May’s divorce deal is unlikely this week.

However, talks between the government and the DUP are ongoing so sterling will likely remain volatile to any headlines pointing to a breakthrough.

US and China to resume trade talks

Apart from Brexit developments, Sino-US trade talks will also be in the spotlight as the two sides begin another round of discussions in Beijing to resolve their months-long trade dispute. Reports that US officials see progress in their talks with China helped ease some of the risk-off sentiment prevailing today, though markets remain cautious as some sticking points remain.

In terms of data, revised US GDP estimates for the fourth quarter will be watched along with a number of appearances by FOMC members, including Fed Vice Chair Richard Clarida at 13:30 GMT and Fed Governor Michelle Bowman at 14:00 GMT. The speech by RBNZ Governor, Adrian Orr, will also attract attention at 20:00 GMT.

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