Morning Commentary: A Teflon Coating

Foreign Exchange - Morning Commentary

A Teflon Coating

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
U.S. PPI inflation for September rose for the first time in three months, causing U.S. interest rates to move higher again today. PPI rose by 0.2%, which was the consensus forecast and brings the YoY rate to 2.6%. Ex-food and energy saw PPI also rise by 0.2%, bringing that YoY rate up from 2.3% to 2.5%. The initial reaction for the U.S. dollar was a short and quick spike higher but that has faded away.
The euro, which is the second most important currency to the U.S. dollar and is a bell weather currency for the market, has been consolidating since June. This is in the face of a rather rapid rise in U.S. interest rates seeing U.S. – German interest rate differentials continue to widen to historic levels. Adding more fuel to the fire is the Italian budget overshoot creating more EU political drama and undermining the euro’s confidence. Yet in the face of both of these factors, the euro remains remarkably resilient as if it has a Teflon coating to shield it from negative factors and news.
Markets are always looking forward. Perhaps there are long term investors who see the euro’s levels as attractive and also see a potential end-game to the Fed’s tightening playbook and want to diversify out of U.S. dollars. More time will be needed to explore this rationale, but for now, the euro continues to deflect a lot of negative news and remains steadfast in its most current range defying many forecasts for a weaker euro.
  • The U.K. reported August trade data, industrial production, and monthly GDP. All three numbers came in pretty close to market expectations but the British pound (GBP) remains better bid going back to last week. Commentaries and press reports suggest a Brexit compromise might be within reach regarding the Irish border situation fueling demand in the short term.
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