Dollar Firm as Weak UK Data Weighs on Sterling

  • The dollar is edging higher to cap off a solid week overall
  • US December IP will be the highlight, but there will be a lot of other US data today as well
  • Ahead of the ECB meeting next Thursday, the account of the last one was released yesterday
  • Weak UK retail sales data have added fuel to speculation of BOE easing
  • Data out of China came in on the stronger side; Korea left rates unchanged at 1.25%, as expected

The dollar is mostly firmer against the majors as the week draws to a close.  The yen and Stockie are outperforming, while sterling and euro are underperforming.  EM currencies are mostly softer.  RUB and CNY are outperforming, while HUF and PHP are underperforming.  MSCI Asia Pacific was up 0.4% on the day, with the Nikkei rising 0.5%.  MSCI EM is up 0.3% so far today, with the Shanghai Composite rising 0.1%.  Euro Stoxx 600 is up 0.8% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 1 bp at 1.81%, while the 3-month to 10-year spread is up 1 bp at +27 bp.  Commodity prices are mostly higher, with Brent oil up 0.7%, copper up 0.8%, and gold up 0.3%.

The dollar is edging higher to cap off a solid week overall.  Yen and sterling were the worst performers this week amongst the majors, while CHF outperformed.  We remain bullish on the dollar and DXY is mounting another test of the 97.50 area.  The euro is sinking back towards $1.11 after being unable to build on its break above the $1.1150 area earlier this week, while sterling remains heavy above the $1.30 area.  Meanwhile, USD/JPY is trading at new highs for this move near 110.30 and is on track to test the 110.65 high from last May.



During the North American session today, US December IP will be the highlight.  IP is expected to fall -0.2% m/m vs. a 1.1% gain in November.  Fed manufacturing surveys for January are trickling out and suggest some recovery as 2020 gets under way.  Empire manufacturing came in at 4.8 vs. 3.6 expected and a revised 3.3 (was 3.5) in December.  Philly Fed was next and came in at 17.0 vs. 3.8 expected and a revised 2.4 (was 0.3) in December.  Kansas City Fed reports next Thursday.

There will be a lot of other US data today as well.  December housing starts and building permits will be reported, as well as preliminary January University of Michigan consumer sentiment (99.3 expected) and November JOLTS jobs openings (7250 expected).  In terms of the Fed, Harker and Quarles speak.  After that, the media embargo goes into effect and there will be no more communications until Powell’s post-decision press conference January 29.

December US retail sales data yesterday were solid but offset by some downward back month revisions.  Headline sales rose 0.3% m/m, ex-autos by 0.7%, and the so-called control group by 0.5%.  Overall, these are solid numbers that support our view that the US consumer is alive and well.  In related news, initial jobless claims fell to 204k for the week ended January 11.  This is just above the cycle low of 203k in late January.  Note next week’s reading will be for the BLS survey week containing the 12th of the month.  If sustained, this drop in claims supports our view that the US labor market remains strong and supportive of consumption in 2020.

The US economy is still doing well in Q4.  The Atlanta Fed’s GDPNow model estimates Q4 GDP growth at 1.8% SAAR, down from 2.3% previously.  Elsewhere, the NY Fed’s Nowcast model has Q4 growth at 1.1% SAAR, down from 1.2% previously, while its estimate for Q1 growth was steady at 1.2% SAAR.  Both models will be updated today.  The Atlanta Fed is likely overstating growth a bit and the NY Fed understating it, but we suspect the truth is somewhere in between.  Either way, we are far from recession and the Fed is right to pause for now to assess the landscape.



Ahead of the ECB meeting next Thursday, the account of the last one was released yesterday.  That was Madame Lagarde’s first meeting and some ECB officials expressed concern about the possible side effects of its easy money policy, particularly the impact of negative rates on household.  This is really no surprise, as this was probably the same bunch that resisted Draghi at every turn.  That said, it’s clear that Lagarde will have a hard time pushing for further monetary stimulus as the eurozone outlook stabilized.  For now, the ECB is on hold.

Weak UK retail sales data have added fuel to speculation of BOE easing. Implied rates now suggest a 75% chance of a 25 bp cut by BOE later this month, compared with 23% a week ago and less than 5% two weeks ago.  Headline retail sales fell -0.6% m/m in December, much lower than the expected gain of 0.6%.  Back month readings were also revised lower, and this follows weaker CPI, manufacturing, and IP data released earlier this week.  Clearly, the uncertainty surrounding Brexit continues to take a toll on the economy and BOE easing expectations are rising as a result of weak data.  Please see our recent piece “UK Economy Continues to Suffer” for an in-depth look at the UK outlook.  The pound depreciated some 0.5% following the date release but is still holding above the $1.30 level.



Data out of China came in on the stronger side, ending the year on a relatively positive note.  Q4 GDP remained stable at 6.0% y/y and 1.5% q/q, slightly higher than expected. That said, full-year 2019 growth of 6.1% is at the bottom of the 6.0-6.5% target. Of note, both industrial production (6.9% y/y) and retail sales (8.0% y/y) came in higher than expected in December. And of course, we still expect some tailwinds coming from the improved US-China trade outlook. The yuan continues to appreciate, gaining 0.26% today to RBM6.860, the strongest level since last July.

The Bank of Korea left its benchmark rate unchanged at 1.25%, as expected.  However, the communication turned more optimistic. Governor Lee pushed back against calls for a rate cut, including two MPC members still voting for a cut.  However, the terms for both dissenters expire this spring. A recent pick up in CPI and incoming fiscal stimulus is another factor weighing against cuts. The 2020 budget will remain very expansionary, focused on boosting investment and household items such as health and welfare.