The U.S. Dollar is trading in familiar ranges after a week characterized by its lack of significant data and mostly talking points from central bankers. Monetary policymakers seem puzzled by the need to normalize and tighten currency supply as economic growth demands it, but inflation is not growing at the desired pace neither in the U.S., Euro-zone or UK.
As a result, there’s lively discussion from two points of view in each central bank: one that sees the need to wait-and-see before acting and the other that warns that current economic momentum will be hurt if interest rates are not increased. This week, policy divergence played a role in determining the dollar’s direction which overall marked an improvement.
Next week will certainly have more indicators that could affect the greenback’s direction. We shall also see if a Senate health bill and focus on tax reform do anything that can affect fluctuations as traders look for signs that the administration can work on its economic agenda despite multiple distractions and accusations.
The Euro has lost about 1.0% of its value since the start of June, falling primarily after hesitation from European Central Bank President Mario Draghi’s to discuss plans for normalizing interest rates. More importantly, while the ECB debates on how to ease its foot off the gas pedal, European leadership is working on unifying in the face of Brexit talks and even their approach to relations with the U.S.
Economically, the continent has recovered, but there are doubts over stability in some nations such as Italy that may weigh on the Euro and keep its gains limited short-term. June may have proven to be a weaker month for Euro, but the confidence behind a new French government and a determined Germany could propel the currency long-term.
The Pound regained some of its losses from earlier this week as further dissent comes from officials in the Bank of England. Kristen Forbes, who has voted within the BOE to hike rates for the last three meetings, explained in a speech that the economy could falter if inflation is not controlled at the moment.
Although the BOE seems to be in the midst of a debate about its rate path, Brexit continues to be the biggest concern as Prime Minister Theresa May struggles to form a coalition within parliament that will follow her now questionable leadership. We see Pound suffering as the struggles continue on the negotiation front and the economic data manifest the negative effects of uncertainty over leaving the EU. One year of Brexit thus far has been very confusing and concerning.