The U.S. Dollar is on a weakening trend following the highly anticipated Fed hike and Dutch election results. The established European leadership can breathe easier knowing that the Netherlands chose not to veer overtly to the right side of the political spectrum, preventing the risk of anti-trade and anti-immigration policies in an important member nation. Perhaps France and Italy might see a similar downgrade for the populists rising there hoping to take power in upcoming elections.
On our side of the Atlantic, the Fed acted as expected. However, the reaction to the telegraphed increment is the result of commentary from Fed Chairwoman Janet Yellen. The action by the FOMC ended up being business as usual: Fed did not shock markets, followed through with what it promised, and explained that there is uncertainty in certain areas of economic advancement.
This interest increase was not a sign of many more to come, in fact, the Fed said two more would be possible, but diffused speculation over a fourth one. Yellen showed some concerns in regards to uncertainty over fiscal policy and with Trump’s administration announcing budget cuts, we’ll have to revise the outlook for the dollar if the expenditures from the government that were mentioned throughout the last few months do not materialize. The USD is likely to stay under pressure in the near-term, next month or so.
The Euro improved based on the lack of a sweeping triumph by Geert Welders and the Freedom Party in the general Dutch election. Centrists earned more seats and Prime Minister Mark Rutte won a third term in office. The charismatic leader, known for biking to work, stated that a coalition will indeed form, but that his party will not cooperate nor ally with Geert’s people. EUR is at its highest level in a month.
It’s possible this means that the popularity of ambitious rightist agendas may not be what a majority wants in a continent that seems desperate to see some change. While terrorist attacks in France as well as Germany may have fueled more anger towards outsiders and earn more votes for anti-status quo political movements, we believe the example in the Netherlands, a very homogeneous country, can be a sign that centrists will have to fight hard, but can still win and maintain the post-WWII order in place. Populists make a lot of noise, but tend to offer very little in solutions and sound policy.
The Pound is trading at its best level in over two weeks after reaction to polls in Scotland showing that the majority would hesitate in choosing independence from the United Kingdom. Prime Minister Theresa May stated that indeed this is not a time for internal conflict and a referendum can wait.
As expected, the Bank of England held its policy unchanged, but Kristin Forbes, a voting member who recently talked about upward inflationary pressures, voted for a 25-basis-points increase to the all-record low rate of 0.25%. We believe the Pound is still likely to fall under mounting pressures that will become a reality once the Brexit officially starts. An emboldened European Union after seeing anti-union forces lose in the Netherlands will not make it easy for the Brits to leave the single market.