Central Banks Turn the Corner, Leaving the USD in their Wake

The U.S administration, and Trump in particular, will be delighted at the weakness in the Dollar, though the weakness has come less from the administration’s failings and more to do with the post Global Financial Crisis era of extreme monetary policy accommodation coming to an end.

We have heard from Fed Chair Yellen in the week, maintaining the FED’s outlook on monetary policy for the remainder of the year, but with the projections largely priced in and perhaps in doubt, economic indicators suggesting that the FED may need to pause through the second half of the year, monetary policy divergence has moved across the Atlantic, favouring the EUR and the pound.

Both central bank heads, Carney and Draghi, caught the markets by surprise this week, with hawkish commentary on what was certainly a flip flop from pervious press conferences, where the ECB President had maintained is dovish tones and Carney held rank amongst rising dissent from within the Monetary Policy Committee Camp.

With the ECB President seemingly aligned with Yellen’s way of thinking on inflation, perhaps a late night chat over a few tumblers and Carney considering the realities of the effects of a weak pound on inflation and domestic consumption, bank stocks have gone bananas and the world has decided that we’re back in 2005.

Central banks may have decided that it’s time to bring to an end the easing cycle, but we’re quite a way off monetary policy reaching anywhere near normalization, let alone the prospect of tightening, though bank stocks on the bounce are not just down to monetary policy and rising yields, the latest stress tests and series of bailouts having added to the attractiveness of the sector.

We’ve seen the Dollar fall from grace this week and one can officially say that the Trump rally has unwound, with the failings of the administration to deliver on a single campaign promise adding to the greenback’s woes.

Trump may be looking to take some credit for labour market conditions and bringing down the Greenback in support of U.S trade, but he’ll only be able to lay claim on the latter and certainly not for the right reasons.

With the EUR up another 0.42% at $1.1426 at the time of the report, making it a 1.61% gain for the current week, any hopes for the Dollar Spot Index to recover from levels last seen in early October of last year are certainly limited at best, with only a stampede of FOMC hawks talking up a 4^th rate hike for the year likely to give the Dollar any chance of a bounce back.

It may be too early to write off the Dollar, but with the bulls hiding in the hills and monetary policy divergence crossing the pond, macroeconomic data will need to be exceptional for sentiment towards monetary policy and the U.S economy in general to draw back the bulls and repel the negative sentiment that has been doing its rounds in recent weeks.

Ironically, the U.S economy may well find it a positive, as has been the case for the Eurozone and the trade led economic recovery and with Trump looking to force companies to return manufacturing to U.S shores, the weaker the better.

On the macroeconomic front, economic data out of the Eurozone included Germany’s consumer confidence and Spain’s prelim June inflation figures this morning, with consumer confidence improving though the number’s impact on the EUR paled into insignificance compared with the better than expected harmonised consumer index price figure out of Spain… With Germany’s inflation numbers to come, the EUR could be in for another wild ride through to the close.

Stats out of the U.S this afternoon include 3^rd estimate GDP figures for the 3^rd quarter and the weekly jobless claims and the numbers will need to improve to save the Dollar from another day of heavy losses, though with economic indicators through the 2^nd quarter having failed to impress, hopes of a rebound will certainly be a case of wishful thinking.

Without wanting to leave out the pound, cable is up another 0.46% at the time of the report, sitting at $1.2986, with its sights on $1.30 levels, with no stats out through the day to break the momentum, the gains in both the EUR and the pound leaving the Dollar Spot Index down 0.30% at 95.722.

What a difference a day makes…