Correction possible but no expectation for dollar strength.
The current dollar downtrend started just after Donald Trump’s inauguration as President. Since June, the move has accelerated without any noticeable correction. Every trend sees corrections as its followers adjust positions and those who were “late to the party” enter then leave positions fearing a correction.
The U.S. has for a long time, had a strong dollar policy. This “macho” image of a currency that can be relied upon to facilitate global trade has been tarnished by a realization that while the dollar “looks pretty on the outside, it is being debased from within”. It is unclear what the long-term effect of the Fed’s programme of quantitative easing will have although the inflation demon remains well controlled for now.
The dollar looks likely to reach 1.2000 versus the common currency but above there will be unknown territory not seen since January 2015.
Tomorrow’s employment data could bring about a correction. if there is no downward correction to June’s headline and July remains strong the market may be convinced that employment is trending higher and bring the prospect of a further rate hike. A third hike couldn’t be ignored as the interest rate differential would be significant.
Is Sterling’s fate about to be decided?
Today’s MPC meeting had been being billed as the most important since its inception twenty years ago. That expectation has waned a little since growth and inflation data have brought a more cautious attitude.
No matter the outcome of the meeting today, concerns over a hard versus soft Brexit continue to drive the pound lower against the Euro. It’s trajectory against the greenback is mostly dollar driven, although from an inflation perspective it is a positive.
The pound continued its slow progress towards 0.9000 yesterday as end of month buying ended. The correction was shallow leading to traders re-establishing long positions in the single currency.
The voting at the MPC meeting is unlikely to be any closer than the last meeting when it was 5-3 against a hike. The voting intentions of new member Silvana Tenreyro are unclear but given her most recent speech about Brexit she is unlikely to be too hawkish in her outlook. The two confirmed hawks, McCafferty and Saunders should vote hike and the one confirmed dove, Vlieghe, unchanged, which leaves Carney, Broadbent and Cunliffe as dovish and Haldane as Hawkish.
Euro Strength a combination of factors
Is there an opposite to a perfect storm? If there is, that would perfectly describe drivers of the single currency right now.
Clearly the Euro is benefitting from the weakness of other currencies, whether that is the political maelstrom currently engulfing the dollar or Brexit and political uncertainty in the U.K.
Currency traders are still prepared to believe that the ECB will hike rates or, at the very least, withdraw stimulus measures sooner rather than later. This is despite Mario Draghi’s insistence that a rate hike is some way in the future. He seems to be the only anchor on the European equivalent of irrational exuberance as the region has emerged virtually unscathed from the crisis.
1.2000? Yes! 1.2250? Possibly 1.2500? Why not? Right now, there seems no limit to how high the Euro can go as widely differing factors push the two currencies in opposite directions.
For now, a reactive pose is suiting the common currency and there is no reason to doubt the continuation of the trend.
Sterling could break 0.9000 should the MPC be dovish in its inflation report which is released today. Beyond that, and should Brexit turn bad for the U.K., parity becomes a possibility. The all-time high is 0.9802 seen in December 2008 as U.K. banks teetered on the edge of disaster.