The US dollar is well bid. There are two overall drivers. First, it has been indicated that President Obama will nominate Janet Yellen to lead the Federal Reserve. This helped lift some uncertainty in the market, though generally speaking, it was well discussed and anticipated by investors, especially since Summer recused himself. Second, an exit strategy from the fiscal impasse appears to be in the works and has helped dial down the anxiety over a possible default, which most investors did not think likely. The US Dollar Index is trading at new highs for the month.
A shockingly poor UK industrial production, once again highlighting the divergence between survey data (PMI) and real sector data, has seen sterling shed over a cent to fall back below $1.60 for the first time since September 24. A break of the $1.5950 level could potentially be important from a technical point of view. It appears to be the neckline of a head and shoulders pattern, which if confirmed, would give potential toward $1.5650. The initial retracement objective of sterling's rally since mid-July comes just above $1.5700.
Industrial production in the UK fell 1.1% in August. The market had expected a 0.4% increase. Manufacturing slumped 1.2%. The year-over-year returns into the red at -0.2% from 1.0% in July. Adding insult to injury, the UK reported a larger than expected trade deficit (GBP9.6 bln vs consensus GBP9.0 bln).
In contrast, and after the disappointing orders data yesterday, Germany reported stronger than expected industrial output figures. The 1.4% increase compares with the consensus forecast of 1.0% and the July data was revised to show a more modest 1.1% decline instead of the initially 1.7% drop. The euro showed little reaction to the news.
The US dollar took on a bid in response to the reports indicating that Yellen would get the nomination. Some may find it ironic, as she is seen to be a dove at the Fed. However, the important take away is that it reduces some lingering uncertainty. While the opposition to Summers came primarily from within the Democrat Party, opposition to Yellen is likely to be emanate from some Republicans who see her has too vested in QE and is, indirectly, a third term for Bernanke. We suspect that Yellen's stance is more nuanced and, in different economic conditions, her views will change. Reviewing her public record, the one characteristic that seems clear is independent thinking and a gradualist.