U.S. Dollar had a tough week, now looking at less volatility
The U.S. Dollar weakened throughout last week and is on a negative
trend as prospects for tighter monetary policy increased in the United Kingdom
and Europe. It is safe
to say that the rally that started after President Trump’s election has come to
an end, with stagnant equity markets and FX hedging losing its volatility. We
expect the dollar to react to headlines related to the remaining
socio-political struggles in Europe such as elections and the Brexit, which is
now slated to officially start on March 29th.
The end of this week will have economic data that could improve Fed
hike chances, but the path to two more increments will be long. Durable Goods Orders and PMI will close
out the week, but statements from Fed officials could add fuel to the fire,
just not sure if that’ll mean dollar will be hot or its chances of short-term
appreciation will be up in smoke.
such a turbulent and busy week, there’s clarity that other major currencies
were uplifted while resource-based ones suffer, especially with the inconsistency
in oil and commodities. However, there is some uncertainty and a spike in
volatility could be caused by anything in the current atmosphere.
The Pound gained last week, strengthening off of a hawkish BOE and as
Prime Minister Theresa succeeded in establishing a timeline for the official Brexit
process. March 29th
we expect the invocation of Article 50 of the Lisbon Treaty which will begin a tentative
2-year negotiation of terms of trade and other ties. This has no precedent,
thus why it is difficult to gauge what the effects exactly will be.
What is indeed known, especially after
the Brits got somehow hold of an internal German government document, is that
the European leadership plans to make the divorce feel exactly like that: an ugly
separation where both parties will be losing something and trust is damaged.
notes highlighted a commitment to make the British regret life outside of the
single market with no benefits of social mobility within the 27 member nations.
An ongoing fight with Scotland over an independence referendum date will likely
affect the GBP, which is why we still feel Sterling will have downward pressure
in the next three months.
The Euro is trading at its strongest level on over month a half as
the Euro-bloc prepares to see monetary policy normalization. After years of heavy QE, it seems like
officials are ready to allow other forces to stimulate the economy. The
European Central Bank will monitor the last batch of sovereign bond purchases
in 2017 while hoping that inflationary growth and lowering unemployment remains.
In France, Marine Le Pen won further support according to polls and
we expect her message to become broader and more engaging since populist Geert’s
attempt at taking power in the Netherlands left a sour taste in the mouths of
alternative movements focused on major change. Euro may have been due for some appreciation,
but we think worrisome scenarios are still to come.