The U.S. Dollar strengthened yesterday following negative market reaction across the globe to the European Central Bank’s admission that the European economy requires some financial intervention again.
The announcement of Targeted Longer-Term Refinancing Operations (TLTROs) certainly bodes poorly for any prospect of global monetary tightening. The result was clear: a globe in the midst of doubt over trade conflicts, anemic pace of growth, and unprecedented challenges to the status quo serve the greenback because it is backed by the one economy that looks steady and still improving.
However, we shall see if indicators moving forward will help paint a different picture of the economic situation. Non-Farm Payroll figures today were shocking, coming in at 20K when the expectation was 180K for the month of February. The ADP Private Payroll numbers earlier this week did not indicate a slowdown at all, thus this is a head-scratcher that could be tied to some after-effects of anxiety over the government shutdown. Clearly, there is room for inconsistency and scrutiny of the economic reality. Thus far, the buck has sustained most gains from yesterday as stocks and currencies worldwide sank.
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The Euro fell to its weakest point since June 2017 following the very dovish decision by the ECB to cut its growth forecast significantly and return to aiding banks. As the economic indicators of the Euro-bloc have revealed, the region is at the brink of seeing recessionary developments, thus why the ECB unanimously chose to set another round of TLTROs as the chosen easing measure to aid the financial system. The idea is to incentivize banks to lend more and spark activity.
This will start in September and it may not necessarily mean doom and gloom for the Euro. In fact, previously when the European Central Bank decided to help, the economy felt the positive effects, which is why we still believe the Euro has potential for appreciation later as the year goes on with likely rosier indicators. A dominant U.S. Dollar will not easily fade, but pressures will build against it as other regions inevitably better their situations.
The Pound deteriorated this week, collapsing by over 1.5% based on renewed worries about the direction of Brexit and the strategy behind it. Without anything new in a divorce deal that could change minds in Parliament, Prime Minister Theresa May is likely to have to ask for a delay and the EU is going to have to grant it.
Furthermore, political gridlock is worse than before since Tory and Labour members are starting to leave their posts trying to conjure a new separate party or simply opposition to the two main players within government. A “No-Deal” scenario is calamity, thus we strongly feel everything will be done by all parties to assure that something is still in the works and has chance of being the ultimate deal. A popular referendum is still possible as well and we sense it is coming eventually.