The Dollar is Back! Can the Dollar Spot Index Break 100?

The Dollar bulls will be looking for a first visit to 100 levels since 2017. While Trump may attempt to kill the rally, the stars are aligning…
Bob Mason
Arms trade business concept.

As We Stand,

The Greenback is on the move this week. Following a long weekend that left the EUR relatively range-bound, there was a rude awakening on Tuesday.

Hopes of the Eurozone finding support from consumer spending came to an abrupt end on Tuesday. The release of the Eurozone and EU’s flash consumer confidence figures for April dealt the knockout blow.

According to the EU Commission, Eurozone’s consumer confidence index fell by 0.7 points to -7.9. Things were not much better for the EU, with the index falling by 0.6 points to -7.7.

While both indicators stood well above their historical lows of -11.3 and -10.4 respectively, the combination of weak confidence and economic indicators ultimately contributed to the shift in sentiment.

When considering private sector PMI numbers out of the Eurozone last week, the response was certainly a delayed one.

Business expectations for the year ahead sat at one of the most pessimistic levels since late 2014. The IMF and ECB downward revision to growth forecasts, weaker demand, and political uncertainty contributed to the weaker sentiment.

For the Eurozone, the auto sector continues to be highlighted as a major area of concern. U.S President Trump will have added to these concerns as the ever-present threat of tariffs linger…

In contrast, economic indicators out of the U.S have delivered far better numbers, in spite of downward revisions to growth forecasts and the FED’s decision to hit pause on the neutralization button.

While ECB President Draghi painted a bleak picture of the economic outlook, FED Chair Powell was more optimistic. In spite of this, the Dollar had struggled.

The Kiwi and Aussie Dollar,

Looking across at the Aussie Dollar and the Kiwi Dollar, both central banks may now be poised to cut rates. 1st quarter inflation figures released by the ABS and NZ Stats have led to a material reversal in both in recent days and there could be more on the horizon. Policy divergence is certainly beginning to make the Greenback more attractive. For now, the FED’s worst case scenario will likely be a hold on rates.

With so much resting on a resolution to the U.S – China trade agreement, the length of the trade war will have to be considered. Market euphoria may not be enough to reverse the latest shift in sentiment.

Looking Ahead

So, which central banks are likely to begin considering the need to deliver monetary policy support?

The ECB and the RBNZ are certainly amongst them. While the RBA has looked to hold off from delivering a materially dovish outlook, this could well change in a matter of weeks.

As for the BoJ, things may even be worse when considering the effects of the ongoing trade war on demand for goods from Japan. Exports continue to slide and inflationary pressures are all but non-existent.

The FED is due to deliver its May monetary policy decision next week. Solid corporate earnings and a decent set of economic indicators suggest that the FED may take a more optimistic view of the economy.

While the statement may fall short of talking of a rate hike, the markets may need to begin pricing out a rate cut later in the year. This is likely to have already begun…

A mass of economic data due out of the U.S this week and next could cause a readjustment, however.

Between now and the FOMC meeting, economic data due out of the U.S include durable goods orders, 1st quarter GDP numbers, inflation figures, consumer confidence and manufacturing PMI numbers.

Softer than expected core PCE price index figures due out next Monday and this Friday’s GDP numbers will likely set the tone.

Geopolitics

Demand for the Dollar could also kick in should stability in the Middle East deteriorate. There’s also the risk of British PM Theresa May finding herself ousted from 10 Downing Street.

There’s also the Spanish elections this weekend. The polls suggest that another hung parliament is on the cards.

Italian politics is already a concern. Uncertainty over Spain and Brexit will likely continue supporting demand for the Greenback and the Japanese Yen.  Even more so the Greenback when considering the shift in sentiment towards the U.S economy.

This Morning,

At the time of writing, the Dollar Spot Index was up 0.06% to $97.65. A slide in the Asian equity markets may well add fuel to the Dollar rally later in the day. European bank earnings due out later this morning will need to be monitored.

U.S equities have returned to record highs, supported by better than expected earnings. In contrast, political uncertainty in both Italy and Spain and the ongoing wrangling over Brexit leaves the EUR in a precarious position. At the time of writing, the EUR was down 0.08% to $1.1218.

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