Uncertain Future of the Dollar, the US growth story has been under intense scrutiny recently,
and this is having a major impact on the value of the dollar.
Topics
Economic Performance in the US
USD: Rising Rates, Weakening Dollar
EUR: The ECB’s Bearish Sentiment
GBP: A Brexit Fix in the Balance
Economic Performance in the US
Markets have scaled back their expectations for Federal Reserve rate hikes,
as they become increasingly concerned about economic performance in the US.
This means that any data releases which show signs of slowing
or weak growth could cause further declines in USD values over the coming weeks and months.
Elsewhere, there are some positive developments for those looking to invest in euro-denominated assets.
Minutes from recent European Central Bank meetings showed a hawkish stance toward monetary policy;
ECB President Christine Lagarde also made remarks suggesting she remains committed
to support an expansionary approach going forward,
both could help bolster EUR values against other currencies such as USD over time.
Overall then it seems that investors should be cautious when considering investments tied to USD right now;
while not all news is bad news with regard to US economic performance,
markets remain uncertain about what lies ahead,
meaning more downside risks exist than upside potential at this point.
On the flip side though those investing elsewhere may find opportunities if they look carefully enough!
USD: Rising Rates, Weakening Dollar
Ricing in Fed rate expectations is now dragging EUR/USD lower suggesting
that the data will continue to haunt the dollar.
The impact of yesterday’s soft US figures was also felt on other USD pairs,
with AUD/USD and NZD/USD hitting their highest levels since late October.
The outlook for these two currencies remains favorable as both countries are expected
to deliver strong economic growth this year and have monetary policy settings
that remain largely unchanged relative to those of the US Federal Reserve.
Furthermore, investors will be closely watching next week’s FOMC meeting
for further clues about how much more dovish repricing we should expect from markets
in response to softer-than-expected data releases over recent months.
If policymakers signal a more cautious approach than currently priced into rates markets,
then there could be further downside pressure on USD crosses
which would likely weigh heavily upon sentiment toward the greenback going forward.
EUR: The ECB’s Bearish Sentiment
The euro has been on a roller coaster ride since the start of 2021, with traders speculating whether the European Central Bank (ECB) will take a dovish or hawkish stance.
Recently, reports have suggested that ECB could switch from its current 50bp hike guidance to 25bp increases instead.
However, this speculation was quickly quashed by Francois Villeroy yesterday as he explicitly stated that President Christine Lagarde’s 50bp guidance remains valid.
This comes at an important time for EUR/USD as investors are looking ahead to Lagarde’s speech in Davos today and her comments could give us further insight into how she views recent developments in Europe and their impact on monetary policy decisions going forward.
We expect her remarks to be broadly consistent with Villeroy’s view and reaffirm the ECB’s hawkish stance despite lower energy prices – which should help support EUR/USD against any potential downside pressure caused by dovish speculation over rate hikes.
Furthermore, we can look forward to some clarity when December 2022 ECB meeting minutes are released later this week;
they should provide more details about dissent within the council regarding “too conservative” 50bps hikes being proposed as well as provide further evidence of multiple 50bps increases being suggested instead – both of which would likely result in additional strength for EUR USD pairs. Considering these factors, we anticipate seeing some consolidation /further upside push towards 1
GBP: A Brexit Fix in the Balance
Starmer is expected to pledge a Brexit fix in his speech today,
to restore good trade relationships between the UK and the EU.
He has been critical of the current deal, which he believes has put too much strain on both sides.
The Labour party’s lead in opinion polls ahead of next year’s general election suggests that Starmer’s softer stance on Brexit could be popular with voters and benefit GBP in the long run.
The pound will likely remain volatile as investors watch for any further developments from Davos this week
but should see some relief if Starmer can deliver what he promises.
In addition, there are no major economic events or data releases scheduled
for today so it looks like traders will focus their attention on Starmer’s speech later this afternoon
as well as other political news coming out from Europe over the next few days.
Overall, while there may still be some uncertainty surrounding GBP due to ongoing Brexit negotiations and other external factors such as US-China relations, a positive outcome from Davos could help restore investor confidence in sterling going forward into 2021