The bleeding stops for the U.S. Dollar. Volatility fading
The U.S. Dollar is trading in mixed ranges, mostly negative
throughout the week after a more dovish outlook from the Fed and political
developments in Europe that eased volatility. It is clear now that the Fed believes the economy is
steady and that there are some uncertainties it wants to monitor such as sustainable
wage increases and improved consumer spending.
Meanwhile in Europe, indicators have also
kept the Euro-bloc on recovery, to a point where the European Central Bank can
ease off the gas pedal when it comes to maintaining an accommodative approach. The
greenback has weakened and the Bloomberg Dollar Spot Index is now at its lowest
level since November 11th.
Treasury Secretary Steve Mnuchin is
attending his first G-20 finance ministers meeting where he has already made
headlines by working closely with his German counterpart Wolfgang Schaeuble and
stating that the U.S. has no intentions of starting a trade war, but will not
tolerate manipulation of currency fluctuations for unfair advantage. In
terms of data, we’ll see if Industrial Production does anything to aid the “buck”
when it’s released at 9:45AM. A 0.2% expansion is expected after it contracted
The Pound has rallied almost 2.0% this week bringing it to its
strongest level against the dollar since the month started. Prime Minister Theresa May does have the
power to invoke Article 50 to initiate the Brexit and polls in Scotland
indicate a call for independence from the UK would not be welcome by an overwhelming
majority. It would be a very tight race.
However, her determination and confidence
could be tested once the process starts because the European side of the
equation may not be so easy to solve. Scottish National Party leader and first
minister Nicola Sturgeon warns that economic concerns in her nation are only
going to be exacerbated if there is no access to the single market. She
truly believes Scotland is ready for freedom.
On the monetary policy side of things,
the Bank of England surprised us with lack of full consensus on their decision
to keep rates unchanged. Kristin Forbes, who is leaving soon, dissented with
her vote to hike. Although she may not influence any other meeting again, it
looks like tightening is in the minds of more central bank officials than just
in the U.S.
The Euro strengthened by 1.3% throughout the week and it’s now at
its best level in five weeks. The European Central Bank looks ready to step away from additional
quantitative easing and some members are expressing optimism in their ability
to hike the benchmark rate before the year ends. At 0.0% for main refinancing
and negative overnight deposit rates, the central bank has exhausted its
instruments in hopes of consistent growth.
Now that Spain is on the rise and inflation finally arrived, ECB member
and governor of the National Bank of Austria Ewald Nowotny has spoken in favor
of an end to loose monetary policy. He thinks the right time is now before prices go up too high. There
are downside risks in the horizon, politically especially, but the EUR may stay
around current levels with some upside if data continues to impress in the next