Year of the Dollar

The Morning Report will now be taking a break until 2nd January 2019, thank you for reading throughout the year. From all at Caxton FX, we wish you a very enjoyable festive season and a Happy New Year. Currency markets remain steady into the festive period as the dollar remains the best performing currency in 2018.

Previous Day's Market Highlights

Thursday was a day of central bank meetings, with the Bank of Japan, Riksbank (Sweden) and the Bank of England all meeting. Neither the BoJ or BoE made any change to monetary policy and gave no hints of their plans for the coming year, with the BoE highlighting Brexit as a reason for not being able to change policy. The major mover was the Swedish krona which strengthened by around 1% after the Riksbank raised rates by 25bps for the first time since 2011. Their key interest rate now stands at -0.25%, with the bank indicating their next rate change likely to be a hike in the second half of next year. Due to general dollar weakness after yesterday's dovish Fed meeting, the euro and sterling gained ground. The single currency traded at a one month high above $1.14 and the pound traded at its best level against the greenback in a fortnight.
 
In other markets, European equities lost ground with the pan-European Stoxx 600 index shedding 1.3% to trade at a two year low, US equities fell sharply, losing almost 2%, as the sell-off continued following yesterday's Fed hike and amid looming fears of a government shutdown. The Dow closed at a 14-month low while the Nasdaq briefly dipped into a bear marketFinally, there was no abatement in the recent oil price rout, with WTI losing 3.8% to trade at its lowest level in over a year, and Brent losing around 3%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1052 1.1349 1.1004 3.04%
GBP/USD 1.2673 1.2927 1.2491 3.37%
EUR/USD 1.1466 1.1472 1.1267 1.79%
GBP/AUD 1.7815 1.7818 1.7208 3.42%
GBP/NZD 1.8750 1.8985 1.8183 4.22%
GBP/CAD 1.7115 1.7175 1.6722 2.64%

Today's Market Highlights

The final trading day before the slowdown over the festive period sees a relatively busy data calendar, with the main highlight set to be final US GDP figures for the third quarter. Expectations are for this figure to remain at 3.5% on an annualised quarter-on-quarter basis, with any deviation from this figure to the downside likely to put pressure on the greenback and further fuel fears of a global economic slowdown.
 
Other highlights include GDP figures from the UK and Canada, while the figures from the UK are unlikely to spark a major market move due to the continuing political uncertainty, however market participants will be looking for the Canadian figure to bounce back into positive territory after the economy contracted last month. The calendar next week is very light on data due to the holiday season, with only US consumer confidence and the monthly Swiss economic barometer of note.

2018 - Year in Review

2018 has been a year of dollar strength, driven mainly by a tightening of monetary policy and US economic growth outpacing other major global economies. To temper rising inflation, the Federal Reserve conducted 4 rate hikes despite concerns from President Trump over increasing rates. On the whole, global central banks have now entered a cycle of tightening monetary policy with 2 hikes from the Bank of Canada and one hike from the Bank of England over the course of the year. The ECB also begun to gradually tighten policy, drawing to an end their crisis-era quantitative easing programme by the end of the year and preparing for a first rate hike in the middle of 2019. However, some things never change, with the BoJ maintaining its ultra-loose stance and showing no desire to tighten policy in the near-term. The RBA and RBNZ also remained on hold, with their first rate increases expected in 2020.
 
Away from monetary policy, 2018 was a year of increased market volatility which was largely driven by geopolitical risks. Front of mind is obviously Brexit, with negative headlines causing significant downward pressure on the pound throughout the second half of the year, especially as the chances of a disorderly, no-deal exit increased. Further risks were posed by ongoing US-China trade tensions, with tariff impositions and heightened rhetoric pushing USD/CNY towards the physiologically important 7 mark. The euro also suffered, with sluggish inflation and rising risk stemming from the Italian budget discussions causing investors to be wary of moving into the single currency.
 
On the whole, sterling has traded in a 12% range over the year against the dollar and is set to close out 2018 6% lower than at the start of the year. It is a similar story with the euro, with sterling trading in a 5% range and set to close out the year 1.5% lower than in January. On the whole, 2018 has belonged to the dollar, with the dollar index ending the year 5% higher.

Away from the FX markets, Brent crude is set to close the year 16% lower around the $55bbl mark despite an earlier 30% rally to multi-year highs above the $85bbl level. Global equity markets also experienced a volatile year, with both the S&P 500 and Dow Jones Industrial Average set to end the year around 6% lower despite both hitting record highs at the beginning of Q4 during a broad-based equity market rally. Finally, the US yield curve has continued to flatten as the Fed raised rates, with the 2s10s spread narrowing to around 10bps. Market participants will pay close attention to this as an indicator of a possible economic slowdown next year, as well as keeping an eye on rising geopolitical risk and the continued global tightening of monetary policy.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP Final GDP (q/q) 0.6% 0.6%
1:30pm USD GDP (q/q - annualised) 3.5% 3.5%
1:30pm CAD GDP (m/m) 0.2% -0.1%