The U.S. Dollar is recouping losses after a day of turbulence following market reaction to President-elect Donald Trump’s comments on the upcoming end of USD strength. Markets are searching for clarity and actual policy frameworks for what the incoming administration will do. Economists are already predicting a hefty stimulus and monetary policy tightening, but fear that too protectionist an approach could derail current economic progress.
The Bloomberg Dollar Spot Index has fallen by 1.2% since the start of the year, but this could quickly change with consistent indicators and a hike by the Fed in the first quarter. In fact, Consumer Price Index figures for the U.S. came right in line with expectations advancing the “buck” further. CPI year-on-year at 2.2% is above the Fed’s target and builds an argument for increasing rates sooner rather than later.
The Pound declined as much as it gained yesterday after a statement on Brexit strategy by Prime Minister Theresa May that earned mixed reactions. For one, it is a positive development that the PM will move parliament towards a vote on finally invoking Article 50 and launch official separation. Nevertheless, this also confirms what many feared: an inevitably hard, arduous, and potentially toxic Brexit.
Banks are especially not enthused since they will now have to make plans to move operations from London elsewhere. This brings along a loss of jobs and services that do not provide much faith in the outlook for the British economy. Despite good wage growth data and no changes to unemployment, GBP has too big a cross to bear to significantly rise in value.
The Euro hit the brakes on a seven-day streak of appreciation by losing ground overnight on concerns over the potential effects of Brexit on the Euro-bloc. It is clear now that the UK will not seek any solution other than leaving the EU for good in the next two years. On top of these worries, Germany had to once again approve short-term debt relief for Greece.
Germany’s Chancellor Angela Merkel also lent her thoughts on Brexit, stating that consensus among the member states in the Union is critical for survival, especially when it comes to dealing with Britain from now on. Although there is inflationary growth with CPI expanding 1.1% (best in 3 years), FX fluctuation will be more dictated by politics and statements in the short-term.