Daily Market Brief 17 May 2017

Politics and Data Hit Dollar

May 17th: Highlights

  • Trump asked FBI to drop investigation
  • U.S. housing data soft
  • Euro at six month high

Trump facing tough times

President Donald Trump’s Presidency is in crisis following revelations from sacked FBI Chief James Comey that Trump asked him to drop the investigation into links between former security adviser Michael Flynn and Moscow.

The interference of the President in a “live” investigation is unprecedented. It is yet another example of Trump’s belief that he is somehow above the law.

From an economic standpoint, the ability of the President to work with Congress to pass his economic, fiscal and healthcare agendas is now very much under threat. There is now also the wider issue of whether this Presidency can survive.

The dollar index reacted poorly falling to 97.92, its lowest since Trump’s election victory in November.

Risk appetite in global markets was starting to return following the elections in France and South Korea which brought less controversial figures to power. It is now in full reverse. The JPY retained its safe haven position rising to against the dollar but, more significantly, also making ground versus a buoyant Euro.

Trump is seemingly unable or unwilling to understand the need to work with all parts of the Administration. His transition from businessman to President may be being viewed as a step too far.

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U.S. Data pushes calls rate hike into question

The turmoil in Washington was just one factor that pushed the dollar to new lows yesterday.

Weaker than expected housing market data called into question the likelihood of a hike in interest rates at the Fed meeting on June 13/14.

Housing starts fell by 2.6% in April following a 6.6% fall in March. This data is a much-viewed measure of economic activity as it feeds through into so many other areas of the economy. Industrial Production and Capacity Utilization for April was also released yesterday. This was a little stronger than expected. Industrial Production rose by 1% and Capacity utilization was at 76.7%, a 0.5% rise from March.

A widening of the interest rate differential between the U.S. and other G7 economies has been a major factor in continued dollar strength this year. Any pause in the Fed’s strategy could see a major correction.

With a light calendar for economic releases for the rest of the week, attention will turn back to Washington.

Euro at six month high as growth hits target

Despite Mario Draghi commenting that he is still not sufficiently convinced by the performance of the Eurozone to warrant a rate hike, the evidence seems to contradict him.

Despite Mario Draghi commenting that he is still not sufficiently convinced by the performance of the Eurozone to warrant a rate hike, the evidence seems to contradict him.

The Eurozone grew at 0.5% in Q1 ‘17 leading to an annualized rate of 1.7%. This matched the previous quarter and called into question continued ECB conservatism. The effect of Brexit is influencing monetary policy in the U.K. and is doubtless at the bank of S. Draghi’s mind. There is a clear feeling that all the hard work pulling the Eurozone out of its near economic collapse could be undone by removing stimulus before the recovery is self-sustaining.

The Euro reached a six-month high against the dollar of 1.1118, also touching 0.8580 versus the pound.

Inflation data was released in the U.K. and was in line with a carefully stage managed expectation fostered by last week’s MPC meeting. Year on Year, consumer prices rose by 2.7% in April up from 2.3% in March although pressure on prices at the factory gate fell. Producer Prices fell from 17.4% in March to 16.6% in April as the effect of the fall in Sterling waned.

Today sees the release of employment data in the U.K. the core unemployment rate will be overshadowed by average hourly earnings. Wages growth has been weak with higher inflation leading to a fall in real earnings.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”