US political risk and monetary policy remain key for the dollar

Donald Trump continues to have a negative impact on the dollar as the market needs to factor in the potential impact of the resignation of Sean Spicer as his press secretary. Add in testimonies for Donald Trump Jr and Jared Kushner and political risk remains at elevated levels in the US. However, factor in monetary policy with the ongoing reaction to the ECB and looking ahead to the Fed means that moves on the dollar and Treasury yields remain key this week. We look at the impact on forex, equities and commodities markets.

FOMC and US flag

Markets were seriously questioning Mario Draghi’s intentions at the ECB monetary policy press conference last week. He used all the right dovish words in attempting to jawbone the euro lower, but to no avail. “Underlying inflation is still subdued”, “We stand ready to increase asset purchases if needed”, “Unanimous in setting no precise date on when to discuss changes”.  That final point, Draghi reiterated to mean “Autumn”. However, having initially slipped on the rates/statement announcement, the euro shot higher through huge multi-year resistance during the presser. Almost the complete opposite of what Draghi would have wanted, it seemed as though traders were calling Draghi’s bluff. There is a degree of uncertainty over exact timing of the taper announcement, which could be September (with the next set of published staff economic forecasts), or October (as some sources close to the ECB suggest). The perception is that Draghi has done little to roll back on his Sintra speech (deflationary forces being replaced with inflationary ones). With the ECDB out of the way, Draghi’s speech at Jackson Hole (24th/25th August) is the next key event to factor in. The euro breakout could have little to stop it near term. However, it is interesting to see that the German 10 year Bund yield is tracking back lower and the all important Bund/10 year Treasuries yield spread is uncharacteristically diverging with the euro. If this continues, is a euro correction looming?

 


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