US political troubles slam Dollar, Euro jumps to two year high

  • Go back to blog home
  • Blog
    Blog|Currency Updates
    Blog|In The News
    Blog|International Trade
    Charities & NGOs
    Currency Updates
    Currency Updates|In The News
    In The News
    In The News|Press
    International Trade
    Press
  • Latest

24 July 2017

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

The US Dollar endured another very difficult few days last week, falling to its lowest level in trade-weighted terms since June 2016 as political woes continue to weigh on the currency.

C
urrency markets decided to look past the dovish message from the ECB on Thursday and focus on the never ending saga of the Trump-Russia scandal and the apparent inability of the Republican party to push through its political agenda. The greenback ended the week down against every G10 currency save Sterling. Meanwhile, the Pound had political troubles of its own as Brexit negotiations appear to be stalling and more financial institutions announce plans to move operations out of London.

This Wednesday is the July meeting of the Federal Reserve. While no change in monetary policy is expected it will perhaps be the last chance for a major central bank to guide markets before the August vacations. This meeting takes on added importance because the gap between interest rate markets expectations and Fed communications on the likelihood of a further 2017 hike is now quite high.

Major currencies in detail

GBP

June inflation data out of the UK set up a weak tone for Sterling on Tuesday. The magnitude of the downward surprise, 0.3% in the headline number and 0.2% in core inflation, was rather unusual and reinforces the view that the pass through from currency weakness has reached its peak. This could result in a delay of a Bank of England hiking cycle.

News that Brexit negotiations were proceeding at a glacial pace, and bank announcements about moving operations out of the UK, both contributed further to this weakness and the Pound ended the week as the worst performer among major currencies.

EUR

At last Thursday’s ECB meeting, President Mario Draghi maintained his fairly dovish rhetoric, highlighting the need for the central bank to remain both “persistent” and “patient” with its large scale stimulus programme. Draghi reiterated that the risks to growth in the Eurozone remained “broadly balanced”, although underlying inflation was yet to show any convincing signs of an uptrend and that a “substantial degree of accommodation” was still needed. The Governing Council were also unanimous in their decision to keep guidance unchanged.

These were all fairly cautious statements, balanced out somewhat by the suggestion that the ECB is not yet too concerned about the stronger Euro. However, any negative impact on the currency was offset by new revelations about the Trump-Russia investigations across the Atlantic, and Euro weakness against the Greenback was short-lived.

Next week, we get the Eurozone indices of business activity for July. These are the most accurate leading indicators of the European economy. The consensus and ourselves expect them to remain at high levels, consistent with growth at or above 2.0% levels. However, these releases will likely be overshadowed by the Wednesday FOMC meeting.

USD

Mixed, mostly second-tier data out of the US were completely overshadowed by the developing political crisis over the alleged ties between Russia and the Trump administration, and the collapse of the Republican effort to repeal Obamacare. The US Dollar fell sharply as any possibility of tax cuts or infrastructure spending this year appears to have been priced out of the market.

We now go into Wednesday’s Federal Reserve meeting with traders positioning very stretched, the US Dollar at one year lows, and a rather pessimistic general view of the short term economic prospects in the US and any chances for further rate hikes. Expect plenty of volatility on Wednesday afternoon.

SHARE