U.S. Dollar Weakness Continues. Risk-Aversion Resuscitated 

 

USD

The U.S. Dollar is trading in mostly weak ranges after a day in which the gains seen since the Presidential election were reversed. The “Trump Rally,” a positive correlation between stock exchanges and the greenback is fading. Equities are 2.0% away from their record highs and the U.S. Dollar is at its weakest point in four months. The theme of risk-aversion is reviving the Yen, which happens to be at its strongest in just as long.

Wall Street seems concerned that the infrastructure spending and tax reform in the President’s agenda may fall short and not materialize especially after seeing the tumultuous nature in congress’s attempts to repeal “Obamacare.” The political drama is casting doubt on economic growth outlooks based on fiscal expenditures that now seem less realistic.

USD may no longer be driven by Fed expectations or economic indicators, but rather over solutions to ongoing gridlock in Washington. Problems elsewhere remain, which will keep dollar afloat, but there is now a focus on how good a job the government can do to sustain the economic advancements seen lately.

 

EUR 

The Euro is still fluctuating around its best levels since November with a sense of relief among the establishment in Europe after good polling figures from Emmanuel Macron after his Presidential debate. There is no data to propel or undermine the Euro’s strength, which is now mostly based on optimism that politics will not break down the Union.

We expect the Brexit to have an impact on the currency, but it is difficult to gauge what the scenes of negotiations will look like and if the effects will be felt right away. Studies have highlighted that the UK is more likely to be affected once it has no access to the single market, but Europe may miss its largest military partner. We feel Euro will be under some pressure since election uncertainty in France and Germany will not go away, but the Brexit process will test FX in unprecedented ways.

 

GBP 

The Pound erased some of its gains from yesterday’s impressive inflation figures following dovish commentary from Bank of England’s Mark Carney. The governor stated that the UK cannot overreact to one piece of data, particularly one that makes sense when considering that a prolonged weak Pound since last June increased demand for British exports and naturally brought the level of prices higher.

Sterling may not rejoice for very long as economists expect very strong and negative reactions from the Euro-bloc nations once Prime Minister Theresa May invokes Article 50, basically demanding the divorce next week. There is news of UK talks with the World Trade Organization (WTO) to coordinate trade agreements with other countries. Many fear the exodus of companies when the official Brexit starts will leave many sectors unemployed and add recessionary pressures to the UK.