Dollar Hits the Ropes, Euro and Pound Rally after Washington Edges toward Stimulus Deal

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The Dollar Index hit the ropes Wednesday after coming under pressure from the likes of Pound Sterling and the Euro when Treasury Secretary Steven Mnuchin indicated that Washington lawmakers are close to a deal on a pre-election stimulus package, boosting stock markets and risk currencies alike. 

Steve Mnuchin told CNBC he’s hopeful an eagerly and long-awaited bipartisan deal on a pre-election stimulus package will be struck, before noting that an anticipated proposal from President Donald Trump’s White House will be similar to that put forward by the House of Representatives’ ‘Problem Solver’ caucus.

The caucus had proposed a $1.5 trillion programme that would put new money into the hands of households and furloughed or redundant workers, with an ‘escalator clause’ that could increase the size of the package in the event that a renewed pickup in the number of coronavirus infections causes fresh disruption. 

“I think there is a reasonable compromise here,” Mnuchin told a conference hosted by CNBC and Institutional Investor, as other media reported increased optimism about the prospects of a deal back in Washington, raising hope that months long deadlock could be broken before the week is out and the U.S. economy backstopped ahead of the winter and November 03 election. 

Above: Dollar Index shown at hourly intervals alongside S&P 500 index futures (green line, left axis).

“US markets have shaken off the weakness seen overnight and are moving higher once again, with hopes of more progress on a stimulus package helping to outweigh the concerns about the election,” says Chris Beuchamp, chief market analyst at IG. “Better ADP figures, a rise in the Chicago PMI and another solid bit of housing data provided another leg for the equity rally, and once again it looks like US economic data is giving US stocks the edge over Europe.”

The Dollar Index had traded a fraction higher earlier in the session but hit the ropes shortly after Mnuchin took the stage as the Euro-to-Dollar rate, which accounts for 57% of flows measured by the barometer, pared back its intraday loss before swinging into the black for the session. 

The Euro has followed the S&P 500 in almost lockstep for months and was lifted sharply in the noon session following Mnuchin’s statement.

Above: Euro-to-Dollar rate shown at hourly intervals alongside S&P 500 index futures (green line, left axis).

Euro-to-Dollar gains came in addition to rampant strength in Sterling, which was boosted after Brexit negotiator David Frost announced the signing of a cooperation agreement with Norway on fisheries which was billed as a necessary precursor to a broader tripartite agreement with the EU. 

“We look forward to putting in place a trilateral agreement between Norway, the UK and the EU on the management of joint fish stocks in the North Sea, once Brexit becomes a reality,” says Ine Eriksen Søreide, Norway’s Minister of Foreign Affairs. “When the Brexit transition period expires on 31 December 2020, the United Kingdom will act as an independent coastal state. The new agreement between Norway and the United Kingdom facilitates fisheries cooperation on control, licensing and research. In addition, it gives the parties the opportunity to agree on reciprocal access to each other's fishing zones and to the exchange of fishing opportunities.” 

Differences over fisheries access have been a key impediment in Brexit trade talks with the EU having sought to retain the same or similar access to British waters as it had throughout membership, in what the bloc might itself describe as an act of ‘cherry picking’ had the boot been on the other foot. 

Above: Pound-to-Dollar rate shown at hourly intervals alongside S&P 500 index futures (green line, left axis).

An agreement is yet to be reached and fisheries are not the only controversial roadblock but with the UK’s negotiator having hailed Wednesday's deal as a key step along the path to a trade agreement, Sterling was encouraged to further the week’s already-healthy advance on the Dollar. 

Trade talks continue, focusing heavily on Brussels’ demands for a so-called level playing field this week, which is a gambit for continued control over UK economic policy under the guise of ensuring “open and fair competition.” 

The two sides have barely more than a fortnight to conclude an agreement before a self-imposed October 15 deadline, although there’s nothing to prevent the talks from running up to year-end when the transition period expires, especially after an influential trade adviser suggested to the Brexit Committee last week that under those circumstances Prime Minister Boris Johnson might then be open to another form of “implementation period.” 

“The UK's Internal Market Bill passed its final stage in the Commons with a majority of 84. No Conservative MPs voted against the bill. Things may get messier in the Lords, and this further cements the late-October/mid-November period as the critical point in the Brexit process,” says Stephen Gallo, European head of FX strategy at BMO Capital Markets.