Technical moves dominate
As political and educational bodies leave for their summer holidays, the FX market has succumbed to several technical factors as its main driver.
The Euro has been on a “one-way street” recently testing 0.9000 versus the pound and 1.1680 against the dollar. These are multi- month highs and some correction was likely. Having reached 0.8995, the common currency fell to 0.8925 against the pound as weak longs were shaken out. It was a similar story for the dollar which was within “touching distance” of a two year high at 1.1715.
Such technically driven moves are likely to dominate through the summer, as liquidity is low, unless there is a major development in the stories that have dominated so far in 2017.
The Federal Reserve and European Central Bank have made it clear that their policies are data driven so any guidance from decision makers will likely back that view. Next week the Bank of England’s Monetary Policy Committee will meet and their discussions have been made a little easier by last week’s inflation data. There is still likely to be discussion regarding the need, or otherwise, for a rate hike, but the Governor is likely to prevail in his view that there are headwinds coming that will need strong management.
IMF cuts growth outlook for U.K. and U.S.
It came as no surprise that in its quarterly review of the global economy, the IMF chose to cut its 2017 growth forecast for the U.K. and U.S.
Citing weak first quarters for both economies, the global lender cut its expectation for the U.K. from 2% to 1.7% and for the U.S. from 2.3% to 2.1%.
The outlook for growth in the global economy is unchanged at 3.5% for 2017 and 3.6% for 2018. As Brexit negotiations start to become clearer and the effect of Britain’s possible exclusion from the single market takes hold, the 2018 growth expectation remains at 1.5%.
The report cited concerns over the long-term effect of Brexit on the U.K. economy and it went on to say that its deliberations were based on a fairly optimistic view of the outcome.
Analysts tend to see the IMF as an ultra-conservative institution designed to outline concerns over the global economy often tending to paint a less that optimistic picture than is often the case. It has been said that once its calculations are complete, it knocks 0.1% or 0.2% for “uncertainty”!
Fed Meeting unlikely to support dollar
The first of the week’s two major events starts today as the FOMC meeting gets under way in the U.S. Traders see no chance of a change in monetary policy although there may be some guidance over the commencement of the reduction in the size of the Fed’s balance sheet.
It is curious that there is far more notice taken over the ECB’s intentions for ending quantitative easing than over the Fed’s actions. That is presumably since the Fed is already tightening monetary policy by raising rates.
The economy is the least of the dollars’ woes right now. Given the political issues facing President Trump which are obstructing his ability to pass legislation that will stimulate the economy there is a possibility that Janet Yellen could turn a little dovish in her post-meeting press conference.
The dollar is suffering from a crisis of confidence which is dragging it close to multi-year lows. The dollar index seems to have based around 93.80 but further weakness cannot be ruled out.
