Dollar Weakness Persists, But For How Long?

Another day of nothing for the markets, the economic calendar on the lighter side across the major economies, with the markets left in limbo during a week of ‘what could have been,’ the disappointment of the FED’s forward guidance reflected in the Dollar’s inability to gain ground against the majors, with the Dollar Spot Index sitting at sub-101 levels once more.

The independence of the FED from political noise does come into question, the two most recent FOMC meeting minutes having FOMC members sitting behind the uncertainty of policies rolling, or not rolling out of the Oval Office. This comes despite the upbeat economic indicators out of the U.S, the economy certainly on a firmer footing than that of the UK and the Eurozone and that’s before considering the respective central bank positions on monetary policy.

Macroeconomic data out of the U.S this afternoon is limited to finalized consumer sentiment figures for February and January’s new home sales. We would expect the consumer sentiment figures to have limited influence on the Dollar, assuming final figures are in line with prelim. But there is one thing for the markets to consider and it is the decision by the U.S administration to delay the roll out of tax reforms in the coming weeks. We would expect the decision to have an impact on consumer confidence in the U.S and elsewhere. So, it really boils down to the timing of the survey and whether the survey was finalized before the administration’s announcement.

Weaker consumer sentiment figures will be considered a negative for the Dollar, the impact on consumer spending already a concern, consumer confidence having eased at the turn of the year, the Trumphoria that had gripped the markets, driving consumer confidence along with the Dollar, abating.

We have yet to see the ease in confidence translate into weaker spending and, today’s new home sales are forecasted to bounce in January, which will be of some relief, though the markets and the FED will likely ponder over how long a rally driven on promises is sustainable.

As things stand, the Dollar will likely find some support through the U.S session should stats be in line with forecast.The markets will need to consider the fact thatthe rise in geo-political risk is not isolated to the U.S, with the British government looking to invoke Article 50 in a matter of weeks and with elections in the Netherlands, France and Germany through the year also there to influence appetite for risk.

Under normal circumstances, we would expect to see the EUR/USD sitting at $1.08 levels when considering the FED’s unwillingness to commit to a timeline on the first rate hike of the year. Marine Le Pen will have had some influence. The Dollar bulls may be a little concerned however, as the hopes of a fiscal stimulus package and tax reforms remain partially priced in. Should the markets begin to grow doubts over the administration’s willingness to deliver, the Dollar could see some weakening. All of this will likely be a consideration of central banks at present and the ECB in particular, Draghi refusing to acknowledge the uptick in inflation, with the BoE governor also discounting the possible negative effects of rising consumer prices on the UK economy.

It’s a dangerous game and, with wage growth continuing to be tested, rising consumer prices coupled with weakening consumer confidence would be a bad combination for central banks to face in the coming months.

At the time of the report, the Dollar Spot Index stood at 100.9, down 0.15% on the day, with the EUR and Cable down 0.06% and 0.22% respectively, the markets treading cautiously through the day. Things will be different in the week to come, a busier economic calendar removing the state of limbo that seems to have gripped the markets at the end of the week, though whether sentiment towards U.S monetary policy and the administration changes remains to be seen.