The Bleeding Stops for the U.S. Dollar; Volatility Fading 

 

USD

The U.S. Dollar is trading in mixed ranges, mostly negative throughout the week after a more dovish outlook from the Fed and political developments in Europe that eased volatility. It is clear now that the Fed believes the economy is steady and that there are some uncertainties it wants to monitor such as sustainable wage increases and improved consumer spending.

Meanwhile in Europe, indicators have also kept the Euro-bloc on recovery, to a point where the European Central Bank can ease off the gas pedal when it comes to maintaining an accommodative approach. The greenback has weakened and the Bloomberg Dollar Spot Index is now at its lowest level since November 11th.

Treasury Secretary Steve Mnuchin is attending his first G-20 finance ministers meeting where he has already made headlines by working closely with his German counterpart Wolfgang Schaeuble and stating that the U.S. has no intentions of starting a trade war, but will not tolerate manipulation of currency fluctuations for unfair advantage. In terms of data, we’ll see if Industrial Production does anything to aid the “buck” when it’s released at 9:45AM. A 0.2% expansion is expected after it contracted last month.

 

EUR 

The Euro strengthened by 1.3% throughout the week and it’s now at its best level in five weeks. The European Central Bank looks ready to step away from additional quantitative easing and some members are expressing optimism in their ability to hike the benchmark rate before the year ends. At 0.0% for main refinancing and negative overnight deposit rates, the central bank has exhausted its instruments in hopes of consistent growth.

Now that Spain is on the rise and inflation finally arrived, ECB member and governor of the National Bank of Austria Ewald Nowotny has spoken in favor of an end to loose monetary policy. He thinks the right time is now before prices go up too high.

There are downside risks in the horizon, politically especially, but the EUR may stay around current levels with some upside if data continues to impress in the next few months.

 

GBP 

The Pound has rallied almost 2.0% this week bringing it to its strongest level against the dollar since the month started. Prime Minister Theresa May does have the power to invoke Article 50 to initiate the Brexit and polls in Scotland indicate a call for independence from the UK would not be welcome by an overwhelming majority. It would be a very tight race.

However, her determination and confidence could be tested once the process starts because the European side of the equation may not be so easy to solve. Scottish National Party leader and first minister Nicola Sturgeon warns that economic concerns in her nation are only going to be exacerbated if there is no access to the single market. She truly believes Scotland is ready for freedom.

On the monetary policy side of things, the Bank of England surprised us with lack of full consensus on their decision to keep rates unchanged. Kristin Forbes, who is leaving soon, dissented with her vote to hike. Although she may not influence any other meeting again, it looks like tightening is in the minds of more central bank officials than just in the U.S.