Is the Trump Bubble About to Pop – Ask the Dollar Bulls

It’s another horror show for the Dollar through the Asian session today, the Dollar Spot Index hitting an intraday low of 99.62 ahead of the European open with any attempts of a recovery stalling.

The market’s impatience over the U.S administration’s delay in rolling out tax reforms and a fiscal stimulus package has now added global equities to the list of victims, the slide in U.S equities on Tuesday a reflection of market sentiment that has been reflected in the Dollar in recent weeks.

The day ahead is particularly light from a macroeconomic data perspective, with no material stats scheduled for release out of Europe and stats out of the U.S limited to February’s existing home sales numbers, which are forecasted to weigh on the Dollar.

Hawkish commentary from FOCM non-voting member Mester this morning provided little solace for the Dollar and with the markets remained largely disinterested in the FED’s outlook on rates so soon after last week’s interest rate decision and economic projections. It ultimately boils down to Trump to stop the markets from stamping the feet.

The Dollar bulls look to have run back to the hills and Trump’s approach has delivered the weak Dollar that was desired, with the global economy for now, spared from a trade war.

We’ve heard little on the outlook on U.S inflation since the FOMC meeting, the FED having revised up its forecast for inflation for the year, but the falling Dollar will likely provide support to a more upbeat outlook, assuming that oil prices don’t collapse and consumers continue to loosen the purse strings.

FOMC voting member Evans, one of the more dovish voting members, spoke on Monday of a willingness to support a 4^th rate hike this year should inflationary pressures build. A failure of the U.S administration to deliver a fiscal stimulus package will ultimately test the FED’s willingness to take a more hawkish stance on rate paths, but it’s going to need at least one of the two for appetite for the Dollar to build once more, from what seems to be a relatively neutral position.

Across the pond, February’s inflation figures released out of the UK yesterday have certainly raised the stakes, the BoE under increasing pressure to make a move before it’s too late, our view having been that the BoE will need to reverse last August’s rate cut sooner, rather than later.

The recent deterioration in retail sales is reflective of the combination of rising consumer prices and weakening wage growth and it doesn’t bode well for the UK economic outlook as the British government looks to embark on a journey into the unknown next week. We can expect some BoE commentary hitting the wires soon, the markets now in search of direction, with the outlook for the pound likely to remain negative over the near-term from a Brexit perspective, any BoE door slamming on the prospects of a rate hike another negative to consider.

Cable bounced to an intraday high of $1.25059 ahead of the European open today, the question being whether invoking Article 50 is full baked into the price. The bigger moves are likely to come off the back of the EU Brexit Summit scheduled for 29^th April, with the muscle flexing ahead of the Summit expected to add to the volatility in the pound.

Over the channel, the upbeat sentiment towards the 1^st French presidential debate eased ahead of the European session, the reality being that, whilst Macron may have come out best, over 40% of voters remain undecided on who to vote for, which brings a significant degree of uncertainty ahead of the 23^rd April 1^st round.

Interestingly, Draghi’s theory of inflation being attributed to a jump in oil prices could be tested in the weeks ahead should the slide in oil continue, with U.S shale producers testing the resolve of the Cartel and Russia.

With the Dollar having been on the back foot through the first half of the week and a lack of material macroeconomic data out of Europe, the Dollar will look to claw back some lost ground going into the European session, but for a Dollar rally, there’s going to need to be a catalyst and, until healthcare reforms have been passed to the house, we’re not likely to see much.

At the time of the report, the Dollar Spot Index is down 0.02% at 99.798, with cable down 0.04% at 1.24734 and the EUR down 0.17% at 1.07928 against the Dollar, the Dollar likely to be on the receiving end of buying appetite for the EUR and the pound through the European and U.S sessions.