A lot of noise filled the sterling news flow yesterday with economic projections of a no-deal scenario and May’s Brexit deal, from both the Bank of England and the government. This was highly expected by markets and failed to nudge sterling, which promptly rallied off the back of broad dollar sell-off later in the session. As crunch time approaches for a deal to be passed, increasing pressure from economists, politicians and businesses to pass the deal is anticipated in a scare tactic to force the marginal voter, but markets seem unfazed as of yet.
The euro capitalised on the dollars weakness after being suppressed from falling oil prices, slumping growth and political risk over the last few weeks. Tomorrow is a light data day for the Eurozone with Draghi speaking at 08:00 GMT and the Financial Stability Review due at some point throughout the day. However, eyes will be firmly fixated on the return in oil markets tomorrow and any tailing off of the dollar from yesterday’s Fed comments.
The dollar was set on a one way street higher following a further collapse in oil prices, but comments from Fed Chair Jerome Powell stating that interest rate are just below the neutral range sent the dollar immediately lower. Powell reiterated dovish tones from Fed member Clarida earlier in the month and raised the possibility of a Fed pause next year, thus prompting a broad sell-off in the dollar. Tomorrow’s release of last month’s Fed meeting minutes may add clarity to the debate of how many hikes the Fed will embark on next year, however, this is more likely to be apparent in the minutes to December Fed meeting. An uptick in tomorrow’s PCE inflation release may see the dollar stabilise for now.
The loonie got pounded as US crude inventories continued to surprise massively to the upside, suggesting demand for refined crude remains too weak to soak up the glut in supply. The loonie looked set to test its 17-month low against the dollar as momentum rose, but Powell’s comments came to the rescue. Eventually, the loonie had to settle for a fresh 5-month low, but escaped a tight place for now. Tensions continue to build in the oil market as WTI crude tests the $50 barrel level, and will likely define the loonie’s price action tomorrow ahead of Friday’s GDP release and the start of the G20 summit.