The US dollar has been mostly waiting for confirmation from upcoming data that the US economy is strong enough and should be able to withstand marginally higher interest rates. Strong US data and a rate hike by the Federal Reserve in December could push the dollar to break outside some of its ranges. This could result in markets switching to ‘wait and see’ mode until such confirmation arrives.
Two currencies that have tried to resist the dollar’s recent upmove have been the UK pound and the Australian dollar. This is because the Bank of England is expected to soon try to bring expectations of a future rate hike back into a more reasonable time frame around the middle of 2016. Instead now markets currently expect the first rate hike in the UK to take place in 2017 – a very dovish stance. Similarly the aussie rallied for its own particular reasons such as the return of positive risk appetite and a no rate cut decision from the Reserve Bank of Australia helped it to recover.
Another important development in markets was that the US benchmark stock index, the S&P 500 continued to rally and as a result erased all the losses it made since China decided to devalue the yuan back in August 11. Indeed the US benchmark is now around 1.5% away from making a fresh all-time high. This ascent has been rather quick and could be vulnerable to corrective action, but it is an important indication that sentiment has improved markedly during the past few weeks.
This sets the stage for some interesting action towards the end of the year – a seasonably favorable period for risk appetite. It appears that despite the slowdown in global economic growth, the support major central banks are providing is keeping the environment a positive one. The market also doesn’t seem to be afraid of the possibility of a quarter-point hike by the Fed – if and when that arrives of course.