Fed rate-hike outlook boosts U.S. Dollar, Brexit now real
The U.S. Dollar has improved by over half a percent overall since
yesterday’s session following positive economic indicators, optimistic
commentary from Fed officials, and a surprising call for Scottish Independence. Another surprise on our side of the pond
was stellar Consumer Confidence, which registered at its highest level in
sixteen years. Market participants seem to have moved past the fiasco over
healthcare overhaul, although many remain doubtful over the administration’s
ability to negotiate more effectively towards tax reform and higher fiscal
expenditures on infrastructure as well as border control.
Now that the United Kingdom has
officially started their divorce from the European Union, we will monitor the
GBP/USD and EUR/USD pairs closely as this event is indeed unprecedented. Today
marks a historic day, but it may go relatively quiet as markets prepare for
statements from EU officials and gauge the initial bets placed by traders. We
also will hear from Boston Fed President Eric Rosengren at 11:30AM and San
Francisco Fed President John Williams at 1:15PM.
The Pound was moving in tight ranges, but fell slightly as the North
American morning began. Across the board, stock exchanges are muted as
investors take in the reality of invoking Article 50. As we have explained before, we feel the
UK may face tremendous challenges moving forward as the EU will negotiate with
a heavy hand in order to not promote or foment any separatist sentiment in any
of the 27 nations left as members. This may prove to be a difficult prospect
because of a rise in populism in the continent and a wish for independence in
Scotland from the crown.
Since World War II, cooperation between
the British and the rest of Europe has been a key factor to maintaining a much
desired peace and opportunities flourished commercially with the ease of flow
of people and business. For the first time in a long while, disagreement is
the modus operandi and we hope that a mutually beneficial relationship can
remain. The devil will be in the details.
The Yen has appreciated by 3.5% since the middle of March,
benefiting from the nature of uncertain markets and a quick turn to
risk-aversion. The Japanese
are trying to push for inflationary growth and the government is working on a
stimulus package to rebuild much of its infrastructure, possibly revamp its
military capabilities as well. We see the Yen improving if negotiations for
Brexit start going sour early and if further mishaps occur in the U.S. as it relates
to policymaking. For now, expect dollar to stay afloat on policy divergence and
potentially as another safe-haven hedge to European chaos.