U.S. Data And Fed Speak Drive Strong Dollar

 | Jan 20, 2019 12:00AM ET

The U.S. dollar rally continues to be supported by strong U.S. data, accommodative comments from Fed officials, and a very strong U.S. stock market. This week also saw big shifts in interest rate probabilities, the market shifted from seeing the next move go from a cut to now favoring a rate hike. Next week will provide many catalysts for the next major move with risk assets. China’s trade talks with the U.S. remain the main risk event for the financial markets, but traders will closely watch the fourth quarter Chinese GDP reading which is expected to shrink from 6.5% to 6.4%. Brexit will also remain on the docket as Prime Minister May will need to wrap up cross-party talks and come up with a Plan B by Monday. May will likely have to extend Article 50, but if she is unsuccessful, things can get ugly very quickly for cable. Early on Wednesday, the Bank of Japan (BOJ) is expected to keep policy steady, but they could lower their inflation and growth projections.

  • China GDP and trade talks in focus
  • Will PM May’s plan B deliver an extension of Article 50
  • The World Economic Forum hosts major leaders in Davos
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This week, U.S. economic data came in mixed with fairly stronger results at the end. On Wednesday, Import and Export prices came in better than expected, the NAHB Housing Market Index also rose as mortgage prices fell, and the Beige Book painted a picture of a strong economy with escalating worries. Thursday, the data was solid as both Jobless claims data came in better than expected and the Philadelphia Fed Business Outlook rebounded and ended a string of weaker prints. Friday’s data saw manufacturing post a strong rebound. The Industrial Production data rose 0.3% in December from the prior month and Manufacturing Production, which is the majority of the nation’s total industrial output climbed 1.1% in December, the best rise in 11-months. We do continue to see several key economic releases be affected by the government shutdown. Some attribute the lack of weakening data points from the U.S. as another reason of support for the recent rally in risk appetite.

Fed speak this week was in-line with what Fed Chair Powell set out earlier in January. The key phrases that Fed officials repeated this week were: Economy performing well, the Fed can be patient, and reassess balance sheet if conditions change. The Fed’s dovish stance is firmly in place and high-beta currencies may finally start to rally if the trade truce is extended and we see global concerns ease.