An Anti-Dollar Conspiracy?

Market Drivers April 18, 2018
UK Inflation data misses
Iran will go to all euro transactions
Nikkei 1.42% Dax -0.04%
Oil $67/bbl
Gold $1345/oz.
Bitcoin $8095

Europe and Asia:
GBP UK Core CPI 2.3% VS. 2.5%
EUR EUR Core CPI 1.3% vs. 1.4%

North America

CAD BOC Rate Decision

Both cable and euro were waylaid by cool inflation readings today knocking both pairs for a loop, but euro rebounded in morning Frankfurt dealing after Iran announced that it will no longer transact in dollars for any of its trades.

In UK the core CPI printed at 2.3% – far cooler than the 2,5% forecast, sending cable tumbling through the 1.4200 level as expectations of BoE rate hike decreased. Ahead of the report the market was assigning an 89% chance of a rate hike in May. After it, the odds dropped to 81%.

This was the slowest inflation number in a year and greatly undermined the case for monetary tightening in May. If tomorrow’s UK Retail Sales also shows a slowdown in demand the unwind in cable could take the pair towards 1.4100 as odds of BoE rate hike will come down even further. Cable has been in a one-way trade towards post Brexit highs over the past week and sentiment has clearly gotten ahead of fundamentals so any further negative economic news could find late longs trapped in the pair and create a selling stampede towards 1.4000 mark.

Meanwhile, in Europe, the CPI also missed its forecast printing at 1.3% vs. 1.4% eyed, but euro rebounded towards session highs after Iran announced that it will no longer use the dollar to settle transactions. The move was clearly a political gambit by the Iranian regime as a response to hostilities towards Trump administration but it may point to something deeper and far more troubling for the dollar. If other key actors begin pricing commodity goods in non-USD terms the buck’s hegemony will clearly be threatened. This is especially so when it comes to oil. The Chinese are already trying to price a contract in yuan and the Russians, burdened by a series of sanctions by US may also choose to move to a different payment method.

All of this serves to explain the dollar’s puzzling weakness in the FX market given its vast outperformance on both growth and interest rate differential level. If EURUSD can climb back above 1.2400 as the day proceeds while USDJPY break below 107.00 the market action will confirm that Iran’s political play may have longer-term economic consequences.