Greenback strengthens ahead of Central bank meetings

US manufacturing data released on Friday came out much better
than expected and has helped the greenback surge against most of
its counterparts. The ISM manufacturing Index rose from 55.3 in
September to 56.4 for October despite a two week government
shutdown in the US, providing a rosier picture for the economy as
investors were reassured into flocking back to the greenback. While
the expectations of Fed policy were fairly dovish, a speech by
Dallas Fed member Richard Fisher proved to be more hawkish than
market sentiment, where he hinted that the US should try to halt
its record stimulus as soon as possible, and move to an
interest-rate based driven monetary policy. Markets will keenly
await Friday’s US GDP figures to gauge the strength of the economy
and further action on Fed policy.

On the other hand, the euro touched its lowest level in more
than six weeks finishing the week just under the 1.35 mark against
the US dollar in the run up to the ECB policy meeting. With
inflation figures coming out less than expected at 0.7 per cent
-well below target of 2 per cent; investors are concerned that
unless rates are hiked this could push the region into deflation.
Thursday witnesses the ECB rate decision where investors are
expecting a 25 bps rate cut; however economists continue to stick
with the view that Mario Draghi will keep rates on hold and try to
pacify the markets.

Sterling also stumbled on the back of last week’s manufacturing
data which saw a slight dip against expectations. GBP/USD currently
stands at 1.59 this morning, well below the 1.60 level where
sterling was consistently trading after the recent positive spate
of economic data. Most of the focus will now be on Thursday’s Bank
of England meeting and the MPC rate decision. Investors continue to
keenly keep a close eye on the BOE statement with expectations that
it will maintain current forward guidance strategy.