De Gaetano Andrea Analista indipendente BondWorld

BondWorld : Dollar rally, take profit opportunities

BondWorld : Dollar rally, with Euro falling from a high of 1.2349 in January 2021 to 1.1561 on October 1.

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Andrea De Gaetano – Independent Analyst

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The greenback strengthened thanks to multiple factors. Solid US data, which was further confirmed last week. GDP grew at an annual pace of 6.7% in Q2 2021. Strong rebound in housing sector (pending home sales +8% in August compared to July). ISM manufacturing at 61.1 in September, above expectations. Personal income and spending on the rise, as well as the consumer price index, important for FED decisions, +4.3% in August compared to last year (+3.6%, excluding food and energy). A rise in the consumer price index not seen since 1991.

The flurry of good US data brings closer the US central bank’s tapering and rate hikes, which could come sooner than expected.

With US inflation running at 5.3% in August, says Philadelphia Federal Reserve President Patrick Harker, the Fed may have reached its mandate’s inflation target. More time is needed to reach the full employment target.

In recent sessions, the flight-to-quality against the dollar has taken the euro/dollar exchange rate to the 1.16 mark. Investors are seeking shelter from volatility and the energy and property crisis in Asia. 

The euro weakened over the course of the year on the back of an accommodative ECB, as Europe’s recovery was less vigorous than that of the US and, in recent weeks, the uncertainty of elections in Germany helped to deflate the euro.

Inflation in Europe is rising more than expected, a headache for the ECB, which is now finding it harder to justify its accommodative policy. European inflation is expected to accelerate to 3.4% in September, well above the ECB’s 2% target.

German inflation accelerated to a record pace in September, 4.1% year-on-year, up from 3.4% in August. This is the strongest jump since 1997, when the time series of European harmonised inflation started.

ECB Vice President Luis De Guindos points out that some drivers, such as supply bottlenecks and higher energy costs, are having a greater structural impact on the inflation surge than the ECB expected a few months ago.

The market’s attention is focused on the US employment data due on Friday 8 October. After disappointing August data, the market expects around 490,000 new jobs in September and an unemployment rate of 5.1%. Since September, the halt to US subsidies introduced for Covid is expected to boost the US labour market.

The issue of the debt ceiling, which must be raised by 18 October to allow the US to finance itself, is still hanging in the balance. The Republicans, in opposition, are putting a spanner in the works. On Friday 1 October, rating agency Fitch issued a warning that the political battle over the debt ceiling could jeopardise the US credit rating.

Against this backdrop, the dollar’s recent rally, which took the euro to the 1.16 area, offers an opportunity for profit-taking on the dollar. 

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