The U.S. Dollar climbed up against most of its counterparts, surging as a result of positive commentary from Fed officials that pushed the chances of a hike in March to 84.0%. In addition, futures markets and dollar bulls also welcomed the speech by President Donald Trump to Congress, characterized by an optimistic tone while still lacking in policy details. Yesterday’s late developments pushed the Bloomberg Dollar Spot Index to its strongest level since January 23rd.
Fed Presidents William Dudley and John Williams, from New York and San Francisco respectively, said that a 25-basis-points hike is under “serious consideration,” because the economy is close to reaching desired levels in unemployment and inflation. The labor market has indeed been consistently improving and the pace of inflationary growth is at its best since April 2012. Personal Consumption Expenditures (PCE Deflator), the Fed’s preferred inflation gauge, met expectations of 0.3% month-over-month and remained close to 2.0% for the year. USD continues to rise based on the good data.
We believe the dollar may continue to see gains or at least sustain most of them. Stock indexes may flourish along creating a positive correlation following Trump’s mentions of deregulation across markets and a boost in infrastructure spending of perhaps $1 trillion.
The Euro fell to its lowest level since January 6th, suffering from policy divergence after yesterday’s hawkish Fed statements. Currently, there are many factors weighing on the Euro from political turmoil to economic underperformance. Italy’s economic indicators have been very poor lately and considering they represent the third largest economy, we feel the shared currency will remain down as long as their struggles continue.
Banking inefficiencies, political in-fighting, and an exhausted population with the status quo could undermine the recovery achieved by the European Central Bank’s measures and fiscal discipline elsewhere. Greece’s ongoing debt problems are also helping in keeping the Euro around levels that were normal in 2003.
The Pound weakened following underwhelming surveys measuring manufacturing activity. The UK IHS Markit’s Purchasing Managers Index slid to 54.6, registering below the expected 55.8 reading. More worrisome is that consumer credit stayed below average in January, meaning that banks are not lending and people are not borrowing because of uncertainty over Brexit effects. GBP is trading at its worst level since January 18th. We feel the swings in FX will not go away until there is clarity in Europe about its disintegration and in regards to economic driven policies in America.