The U.S. Dollar is trading within tight ranges as the week closes without any major data and with erroneous news of a Chinese concession on trade.
The world’s two largest economies have been trying to calm down fears over a “trade war,” although the current administration has promised to impose tariffs for the sake of national security on metals such as steel and aluminum.
This also involves Europe as well, where the potential for barriers to trade have been met with heavy criticism particularly from European Union President Donald Tusk. The Iran Deal being rejected by the U.S. has left a wound on the Europeans, who want to keep the terms alive. Currently, the greenback is benefiting from playing a safe-haven to more chaos elsewhere and better economic performance.
Overall, the buck advanced by 1.4% this week according to the Bloomberg Dollar Spot Index. We foresee more action in the FX market next week as we hear from the Federal Reserve, gauge Durable Goods, and examine growth in the U.K.
The shared currency is down by 3.0% thus far in May as our expectations of economic divergence and trouble in Italy have finally manifested themselves as Euro-weakness. The broken-record news of the ongoing struggles to build a government in Italy continue to dampen the value of Italian bonds, thus keeping investors scared for the future of the EU’s third largest economy. The coalition of newcomers would love to just write off debt and spend in ways that would challenge all rules set by EU financial regulatory commissions. Doubt over the country is not going away soon.
The Pound declined by 2.0% since the start of the month and its slide is set to continue with more confusion amongst U.K. leadership. Brexit is tearing apart Prime Minister Theresa May’s government as she tries to fix the details of talks with Europe, in particular a new proposal that could help ease the worry over a hard Irish border.
Tensions keep building within her political party, the Tories, who face a turbulent future because of disagreement among themselves on where Britain should head with trade. It is difficult to predict a good future for the British economy and we feel elections may become necessary because currently no one is truly in charge or leading with confidence. Without mandate there is no cohesion necessary for the U.K. to hold one position and talk with the EU with clarity.