The FED and the BoE Take Control of the Dollar and the Pound. Will it Last?

Trump will have learned some important lessons in the last few of days, the first one being that he has no control over the direction of the Dollar, and the economy for that matter, the bounce in the Dollar coming off the back of the FED’s hawkish sentiment, driven by labour market conditions. His second lesson should be to let sleeping dogs lie. The inevitability of an investigation into the man himself was clear for all to see and the tweeting has certainly not helped his cause, with any unravelling of an interference into investigations raising the stakes for the Republican to turn their backs on their leader, those that have yet to do so of course.

Interestingly the direction of the Dollar was unwavering following news of the Trump investigation hitting the wires and there’s likely to be a reason for this. A total failure by the U.S President and current administration to deliver on any of the growth policies pledged during the campaign trail, with even tax reforms that had been flouted in brief weeks ago and promised to be rolled out by the end of May seemingly vapour trail as of today.

We had previously seen market panic over any negative sentiment towards the U.S administration. So, have the markets turned the corner, would we see a Trump rally of a different kind in the event of the U.S president being caught out on his relationships and in some cases lack of them?

It could be a Trump rally akin to the November 2016 Trump trade, this time the markets celebrating a swearing into office of a President who has the ability and support to deliver. The Republicans are a broken party for now and not only has Trump failed to unite the country, he’s also managed to further breakdown a party that needed gluing together.

Central banks have certainly ruled the roost this week, brushing the effects of political risk aside, with the FED hawks being joined by an unexpected level of dissent from within the ranks of the BoE’s Monetary Policy Committee, which comes as the UK economy faces significant headwinds amidst rising consumer prices and weaker wage growth, the positive being the level of claimant counts and the unemployment rate, though it’s only going to be a matter of time should there not be a shift in either policy or sentiment.

Both the Dollar and the Pound received the attention warranted, but as the days pass, one does need to question whether the Dollar bulls can really hold on and whether the markets can really be desensitised to geo-political risk, particularly risk that involves the President of the United States.

With no macroeconomic data out of the UK, there’s another month to wait to see whether inflation and consumer consumption will force the Committee’s hand, the 5-3 vote certainly a surprise, leaving the pound in the hands of market historians and Theresa May. It’s worth noting that the historians will likely be quick to point out that dissent in the ranks of the MPC is nothing new and with that in mind, it’s also worth noting that Karen Forbes, the instigator of the dissent this time around, will be leaving the Committee at the end of the month and we’re unlikely to see a new member start dissenting from the off, which takes it down to 2 in the market’s eye.

That should ultimately be a negative for the pound. Rising consumer prices in the current environment and the BoE’s position on monetary policy is a negative for the economy, with household debt rising, wage growth easing and most importantly, a slide in spending. Throw into the mix the continued political uncertainty over what lies ahead for the British government and Brexit and we can expect some softening in the pound.

Across the pond, the market’s ability to brush aside increasing noise from Capitol Hill will also likely begin to wane, the only good news for the Dollar Bulls being the FED Chair’s gamble on a labour market driven inflation outlook that continues to support the FED’s monetary policy outlook for this year and next.

Economic data out of the U.S on Thursday was better than forecasted for the manufacturing sector, but it was mixed nonetheless, when compared with April numbers, the key to Dollar gains on the stats being the weekly jobless claims numbers, the FED Chair having put the spotlight on the labour market once more, with market sensitivity to labour market data likely to become even more heightened, if that is at all possible.

With Trump’s popularity on the slide from already record lows, the markets will get a chance to gauge whether the administrations failures to deliver on pledges and the ongoing investigations have had any impact on consumer sentiment. May’s retail sales figures would certainly suggest that the game is up and that consumers have had enough and weak Michigan Consumer Sentiment figures today will suggest that further weakness in consumption is to come, which would certainly bring the Dollar back down to earth, the Dollar Spot Index managing to hold on to this week’s gains, up just 0.01% at 97.442 at the time of the report.

With Trump in the doghouse, Theresa May is also beginning to find it tougher, the Tory Party leader’s popularity also on the slide in the wake of the snap General Election. The Tory Party leader’s popularity has fallen from a plus 10 before the election to minus 34 over the last week, while Labour Party Leader Corbyn has seen his popularity rise from minus 42 to zero, according to the latest YouGov poll published this week.

Adding to this is a slide in support for the Tory party, which has seen its popularity fall from plus 85 to plus 57, with the Labour Party rising from minus 25 to plus 6.

The blame for the shift will certainly be placed squarely on May’s shoulders, but with a strong possibility of a Labour Party victory in the event of a Tory Party squabble and call for a general election in a vote of no confidence, May’s holding on to her place for now, but at a price.

For now, the talk is of a deal done with the DUP, but until its signed, sealed and delivered, there’s certainly a risk of a collapse and a Labour Party led minority government, however slim the chances, which leaves the pound in limbo, off the back of recent bonce from this week’s sub-$1.27 lows.

The markets are certainly in for an interesting week ahead, with the Eurozone member state politics seeming to be the most reliable, quite a turnaround following the rise of populist parties ahead of this round of elections.

At the time of the report, the cable has held onto its gains on hopes of a deal between the Tories and the DUP being announced, the pound up 0.20% at $1.27831, though moves through the rest of the day will largely be hinged on progress made on an agreement between the Tories and the DUP, a breakdown still a possibility, however slim. With a year of surprises, the markets will be hoping that this is not another.