In the first quarter of 2017, several notable events kept volatility high in the global financial markets.
Looking forward, the trend for the US dollar is not established but the first quarter’s events do provide some guidance on what to expect in the just-started second quarter.
The US Dollar Index, a measure of the value of the US dollar against a basket of G-10 currencies, was 2.5 per cent lower through Q1. More than two months into Donald Trump’s presidency and the administration is already littered with a growing list of stalled plans – the stalemate with Mexico, the travel ban, power struggles between the executive branch and the judicial branch and the lack of traction in Mr Trump’s efforts in reducing their global trade agreement participation.
Of all the setbacks, perhaps the biggest failure was Mr Trump’s attempts of repealing Obamacare. Even though Republicans dominate Congress, Mr Trump could not even get the repeal to a vote, which shows a growing friction from within the Grand Old Party. These developments, and the aforementioned setbacks, throw even more uncertainty in the new president’s attempts to push forward future policy.
Mr Trump has promised a host of fiscal measures, including large tax cuts and boosts in government spending – efforts that will no doubt go a long way in stimulating the US economy – however, judging by his first two months there is no guarantee he has the lobbying power to push through such measures with ease.
The Federal Reserve in the first quarter began its round of rate hikes for 2017 and it is also adopting a more dovish stance before committing to a more aggressive rate hike cycle. The markets are pricing in a minimum of two more rate hikes this year with the next opportunity coming in June.
While the US data docket has been showing signs of improvement – the labour market has averaged more than 206,000 new jobs in Q1, core and headline inflation remains well within the Fed’s target and US growth continues to firm up – these core US figures would need to continue to improve to support the dollar going forward as this would increase hawkish sentiment in the Fed. The problem with overcommitting to dollar longs in this period is Mr Trump’s insistence on a weaker dollar. He has taken potshots against countries such as China and Germany and his studies into ways to penalise currency manipulators do not bode well for the greenback.
Having said this, the US Dollar Index looks primed to hold above 98.90 levels with upsides capped initially at 101.50 followed by 102.70 levels in the weeks ahead. The index was at 100.50 on Tuesday morning.
In Europe there were no further policy actions this past quarter from Mario Draghi, the European Central Bank president – rates remain in 0 to negative territory and the current monthly pace of asset purchases of €80 billion per month will drop to €60bn per month from this month.
While there is slight traction in European data – improving employment has no doubt aided disposable income – inflation remains lagging and the ECB seems to be standing ready to extend its current QE programmes. We do not expect to see a significant bump in the European data docket in the upcoming months, but do expect volatility to remain high in Euro crosses.
France goes to the polls this month. The anti-EU nationalist Marine Le Pen is expected to win in the initial rounds and her performance in the later stages will be closely monitored. Early indicators hint that she may suffer a setback when the country goes into round two of voting on May 7 – however, if 2016 has taught us anything it is to be ready for surprises.
All things considered, we see initial support in Dubai Gold & Commodities Exchange (DGCX) EUR-USD contract at 105.84 with upsides capped at 108.50 in the weeks ahead. The pair was at 106.60 on Tuesday morning.
And finally, the British pound has enjoyed a bit of a renaissance in the past few weeks. With the British markets barely blinking after the formal triggering of Article 50 last week, the GBP-USD contract has continued moving upwards to 1.25 dollars to the pound on DGCX. We expect further upsides in the pound as weaker shorts continue to get squeezed out before resistance kicks in at 1.27 levels.
Overall the medium to longer-term picture for the pound does not change – the economic lag of the Brexit has not fully been represented in the UK data docket – and we expect this to start gaining momentum through the later part of Q2, which would again expose our medium-term target of 1.19. That compares with on Tuesday morning’s level of 1.245.
Gaurav Kashyap is the head of futures at EGM Futures.
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