Daily Market Update

U.S. Dollar king after a week of damage elsewhere

September 28, 2018

The U.S. Dollar is trading in very positive ranges as surprising developments in the Eurozone made it go-to safe-haven asset, once again.

Overview

We are now convinced that Italy’s struggles and its populist government are tremendous challenges for the EU moving forward that condemn the Euro to pain in the short-term. A solid economy in the U.S. is a big contrast to the EU, which faces Brexit and other trade tensions as well.

Ultimately, the Fed’s confidence, strong Gross Domestic Product growth, and the ability to ignore political distractions has resulted in the greenback recovering lost ground in Q3 and at the moment is trading at the strong levels witnessed at the start of July, all according to the Bloomberg Dollar Spot Index.

Some data to close the week in the form of Personal Income and Personal Spending revealed expansion almost meeting the high expectations of 0.4% and 0.3% respectively. August Income ended up coming up at just 0.3%, while spending was in line with estimates. We shall see if Consumer Sentiment at 10AM does anything, but it is the last statistic for September. We think volatility for Euro and the majors remains high, but likely the buck will sustain its rise starting October and the last quarter of 2018.

EUR

The Euro fell dramatically as European market watchers got the news of a higher deficit than desired for the upcoming Italian budget. This country’s government had been consulting with EU officials in order to better accommodate the budget to abide by spending and regulatory standards. Additionally, financial heads in the European Union feel the revenue/expenditure situation in Italy has been worrisome for quite some time and new spending programs could cripple the country.

Well, the populist government decided that it would allow its deficit to actually be 2.4%, a level way above the 2.0% that is wanted to prevent lower credit ratings and other financial low grades. The lack of cohesiveness and the affront to EU rules bodes poorly for the continent and its ability to enforce or at least influence fiscal health of member nations.

GBP

The Pound is losing at the moment because of GDP figures for Q2 that underwhelmed. While the quarterly average met the expected 0.4% expansion, the yearly average lowered at 1.2% under 1.3% expected. Brexit fears have held the country’s administrative progress in check and no other issues domestically have been worked on besides Brexit.

Austerity held back growth as the U.K. recovered from the financial crisis, but it is now uncertainty over what trade will look like that is an obstacle to confident investment. We are of the opinion that the dollar has room to lose if economic effects from trade tensions manifest themselves, but thus far it is the U.S. dollar getting faith behind it that Sterling and others do not merit.

 

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