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.
After 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 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.
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.
The 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.