Dollar rally continues as Powell re-elected Fed chair

The US dollar continued to advance against its major counterparts on Monday on the news that President Biden had chosen to re-elect Jerome Powell for another term as chair of the Federal Reserve.?

Powell was the clear frontrunner going into the announcement, although there had been growing speculation that fellow FOMC member Lael Brainard may have taken over the helm once Powell’s term ended in January. Biden did, however, opt for the status quo, much to the relief of markets. Investors tend to react negatively to a deviation from continuity, while Brainard herself is also perceived as a more dovish committee member than Powell and her appointment would have almost certainly caused the market to dial back bets in favour of Fed rate hikes. The removal of such a possibility has, therefore, seen the dollar rally - futures markets are now pricing in more than 70 basis points of Fed hikes before the end of 2022, up from around 62 last week.

One of the big losers among the major currencies continues to be the euro, which crashed to a fresh 16-month low around the 1.125 level yesterday. The common currency is being battered on two fronts, firstly from the European Central Bank, which has continued to insist that no interest rate hikes are on the cards until at least 2023. New COVID-19 cases are also rising aggressively in the European continent, notably in Germany where infection levels are at record highs. Lockdown measures are being reimposed in a handful of nations, including Austria and the Netherlands. Germany, among others, look likely to follow suit soon and that doesn’t bode very well at all for Euro Area growth. Somewhat surprisingly, this morning’s Eurozone PMIs for November actually held up rather well, with both the services and manufacturing indices beating expectations. We see this as a trend that is unlikely to continue as more nations in the bloc look to tighten their virus restrictions.

Sterling also continued to retrace some of its recent gains on Monday, with the GBP/USD pair slipping back below the 1.34 level. The pound has, however, outperformed most of its major peers of late, notably the euro, with the GPB/EUR cross still trading around its strongest position since early-2020. Macroeconomic data out of the UK has largely beaten expectations in the past week or so, including this morning’s preliminary PMI figures for November. According to Markit, the key services index held firm at a comfortably expansionary 58.6, just above the 58.5 consensus. All in all, the outlook for the UK economy in the immediate-term looks slightly more promising than in Europe. New virus cases remain relatively high in the UK, although that has a lot to do with far greater testing levels in Britain. The test positive rate remains low (4.4% vs. 17.3% in Germany), and a winter lockdown appears unlikely. As things stand, the market is now almost fully pricing in a 15 basis point rate hike from the Bank of England in December, and that is providing sterling with some solid support.?