Dollar rising on inflation expectations and rake hike odds

XM Investment Research Desk: The US dollar recovered losses made against the yen earlier in the day when it registered its biggest drop in a day in almost a month. The greenback climbed to a European session high of 112.78 yen after having slipped to as low as 111.35 in today’s Asian session in what was seen as profit-taking after a strong rally that took the USDJPY pair to 8-month highs on Friday.

The dollar is seen to be supported in the near term by rising inflation expectations and high odds of a rake hike by the Federal Reserve in December. It is an important week for the dollar as key US jobs data are due (nonfarm payrolls on Friday and the ADP employment report on Wednesday). US GDP is out on Tuesday.

In Europe the focus was on politics, which has been the main driver of the single currency recently. The euro received a brief boost early in the day on the results of the French conservative party primaries which saw Francois Fillon winning and this was seen as being euro-positive. However, there are more significant political uncertainties that will arise before the French elections. The Italian referendum next week will be closely watched and could weigh on the euro.  If there is a No vote in the constitutional reform referendum on December 4, Prime Minister Mateo Renzi could resign and this could lead to early elections and the rise of the euro-skeptic party – Five Star Movement.

The euro gave back nearly half of the day’s gains versus the dollar and fell to a session low of $1.0562 after having hit a European session high of $1.0668.

ECB President Mario Draghi testified before the European Parliament today on the region’s economic outlook and prospects after the Brexit vote. Hs said the Eurozone economy remained resilient this year.

Sterling was one of the weakest major currencies in today’s European session.  Cable fell from an Asian high of $1.2530 to a European session low of $1.2384. Brexit-related news weighed on the pound after a report today revealed another court challenge by UK think tank called British Influence. They suggested that Article 127 of the EEA also must be triggered in addition to Article 50 to get the UK out of the EU.

Oil prices swung wildly ahead of a meeting of major oil producers in Vienna on Wednesday. It is likely that oil prices will be volatile until there is more clarity on what exactly the OPEC deal will be and whether oil producers will agree to cut output levels. After posting steep losses on Friday and slipping to a low of $45.12 a barrel in Asian today, WTI oil rose to as high as $47.27 a barrel in European trading.

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