Dollar trades lower as geopolitical risks rise

he news of the killing of the highest-ranking military figure in Iran by a US drone strike focused traders attention in the absence of any macroeconomic or policy news of note. The initial market reaction was, curiously enough, to send the US dollar lower, although the moves were modest in size.

In addition to the headlines from the Middle East, two events will hold markets’ attention. Tuesday we get the flash inflation data out of the Eurozone, where we hope to see a continuation of the upward trend in core inflation. Then on Friday, the US payrolls report for December comes out. We will be looking for a continuation of the strength seen in November.

GBP

The pound has recovered nearly all of its liquidity-driven sell-off against the euro on the last day of 2019 and is currently trading back above the 1.31 level versus the dollar following this morning’s upwardly revised services PMI.

In the near term, sterling performance will be determined by both euro movements against world currencies and headlines regarding the negotiations for a final Brexit deal. If previous negotiations are anything to go by, we are unlikely to receive market-moving news until the self-imposed deadlines draw closer. Boris Johnson has until the end of June to ask for an extension to the transition period. Should it become clear that an extension is not on the cards, then we may start seeing a bit of weakness in the UK currency.

EUR

Most sentiment indicators out of Eurozone continue to grind higher, with the conspicuous exception of German manufacturing. This week’s inflation data is key. The core number has been trending up over the past few months and is now bumping up against the 1.3% level that has been a ceiling since early-2017. A print above this level would be quite significant and should be supportive for the euro.

USD

While the rising Middle East tensions have boosted some safe havens like the Japanese Yen and US Treasuries, the US dollar has so far not joined the rally.

US Treasuries rallied sharply last week, shrinking the differential in interest rates between the US and the Eurozone. On the economic front, second-tier data out of the US has been weaker lately, and the payrolls report out on Friday takes on additional importance. Investors are eyeing a fairly solid job creation reading around the 160k mark. As always, we will also be paying close attention to the latest earnings data, expected to remain above the 3% level year-on-year.