The US dollar has weakened as investors start to question the outlook on the US and global economy, there is a growing sense that the US economy might have improved to its maximum level and that the Fed will now start to consider slowing its path of raising interest rates. Stock markets have been exceptionally volatile on this news and whilst they have recovered for now, investors are beginning to question the longer-term outlook. This will ultimately weigh on the US dollar and could mean its recent period of strength has passed.
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Another threat to the prospect of future interest rate hikes, which would see the US dollar weaken is President Trump. He has made no secret of the fact that he'd like the US Federal reserve to be less bullish (strong) in their pursuit to raise interest rates, feeling it would harm growth. The Trade Wars are also largely Trump’s idea and the continued uncertainty about how they will escalate is a reason for the Fed to pause, and again see a weaker US dollar.
The US Federal Reserve is still predicted to raise interest rates in December but any fresh signs of backtracking on this expectation would see the greenback coming under pressure.
There is important US economic data to finish off the week with Jobless Claims today at 13.30pm and a speech by James Bullard, a member of the Fed at 15:00pm UK time. Earlier in the month, he had stated rates would not need to rise much higher so it will be interesting to see if his viewpoint has shifted.
This week is a major time on GBPUSD levels with the EU Brexit Summit in Brussels. The optimism of a deal that last week helped the pair to 1.3250 has quickly diminished and were the dollar not slightly weaker itself, cable rates could easily be back below 1.30.
It seems a deal is unlikely to be agreed over the next 48 hours but anything can happen with these summits and sterling will remain very sensitive to any sudden news that is released. Much of the bad news is priced in already so it might be that any lack of news sees sterling just about hold its head above 1.30, in the 1.30-1.31 range. Any particularly negative commentary or reports could very easily see us back below this important threshold.
Clients with a position buying or selling dollars or pounds might wish to make some contact to establish a strategy as the potential for any Brexit news to trigger unexpected moves is high.
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