The main drivers of the currency markets today were risk aversion and the return of expectations of a Fed rate hike. This led to a stronger dollar against most major counterparts except against the safe haven yen.
The greenback bounced back from lows hit on Friday in the wake of the Fed’s decision not to raise rates immediately. However, recent comments from several Fed policy makers (Bullard, Lockhart and Williams), suggested that a rate increase remained possible, even for this year. Investors are now waiting to hear from Fed Chair Janet Yellen, who is due to speak on Thursday.
Risk aversion was also the dominant theme in markets today, with European equities falling sharply and also impacting the currency markets.
The euro was one of the worst performing currencies and has lost over 1% of its value against the dollar since yesterday. Monetary policy divergence between the ECB and the Fed played a big role in the euro’s moves today, pushing the single currency down to 1.1136.
While the Fed is expected to hike rates, the ECB is considering even more accommodative policy. Recently, ECB officials indicated to the markets that they are prepared to do more if Eurozone inflation is at risk. The focus now turns to ECB President Mario Draghi’s testimony in Brussels tomorrow. This is a quarterly hearing at the European Parliament’s Committee of Economic and Monetary Affairs.
Meanwhile, investors will also focus on Eurozone PMIs numbers along with the German IFO report due out tomorrow. Disappointing data would lead to further euro weakness.
Sterling underperformed on a larger-than-expected budget deficit for August, which came in at GBP12.2 billion. A broadly stronger dollar also pressured the pound. Cable fell below 1.54 and gave up gains of a one‐month high versus the euro. Cable fell to a low of 1.5370. The euro rose to 72.47 pence.
The dollar briefly dipped below 120 yen on safe‐haven flows as European stocks fell. The greenback touched a low of 119.68 before bouncing back to test the 120 level.
Looking ahead to Thursday’s data, the main focus will be on global PMIs.