Global Themes

The U.S. dollar steadied Wednesday but maintained a vulnerable bias. The buck has favored its back foot since early last week as global tensions simmer, confidence wanes in the Trump administration advancing a sweeping pro-growth agenda, and U.S. data have been soft. Consequently, expectations of a trio of Federal Reserve interest rate increases this year have waned, weighing on the U.S. currency. The British pound held on to the lion’s share of a two percent rally Tuesday which came on surprise news that Britain would hold early elections in June. Sterling exploded to six-month highs, staging its best single-day rally of the year. Global instability weighed on commodity currencies, pulling the loonie to two-week lows and the Aussie dollar toward recent mid-January lows.


The euro owes its buoyancy to broad-based weakness in the U.S. currency which has helped to overshadow political uncertainty ahead France’s two-stage presidential vote that gets under way Sunday. The euro could be skating on thin ice should one of the anti-Europe candidates, like the far-right’s Marine Le Pen or the far-left’s Jean-Luc Melenchon, fare well in the first round and advance to the decisive run-off vote on May 7. On the other hand, the euro might be in line for a relief rally should one of the moderate candidates become president such as centrist Emmanuel Macron or Republican Francois Fillon.


The dollar steadied Wednesday but maintained a fragile bias, pressured by the president’s stalled agenda and how softer U.S. data has dampened expectations for as many as three Fed rate increases this year. The odds of the Fed raising rates by June receded to a 44 percent chance, according to a leading market barometer, following tepid U.S. data last week on consumer spending and inflation. The economy would need to produce a stronger set of data to help the dollar rebuild a bullish base. U.S. jobless claims are due Thursday followed by existing home sales Friday.


Persistent global tensions weighed on broader market sentiment, pressuring commodity-based currencies such as the Canadian dollar. The loonie tested two-week lows with its next cue looming Friday when Canada releases central bank-impacting inflation data. Consumer prices are forecast to moderate inside of the Bank of Canada’s 2 percent bull’s eye. Slower inflation growth would leave the loonie susceptible against the dollar given how the Fed is moving gradually to boost borrowing rates which make the greenback a more enticing bet.


The pound held on to the lion’s share of its most powerful rally of the year when it appreciated some 2 percent Tuesday on hopes that Britain’s early election might allow Britain to secure a more economy-friendly divorce deal with the EU. Prime Minister Theresa May called an early election on June 8, three years ahead of schedule. Mrs. May decided to roll the dice and stake her job on the election, hoping it would allow her Conservatives to increase their majority in the House of Commons. Mrs. May hopes to get a divided parliament to unite and coalesce around a more cohesive plan for when it starts Brexit negotiations with the EU. The pound stands to gain from anything that diminishes Brexit uncertainty. Still, fundamental forces loom as a headwind on the U.K. currency with the economy expected to moderate this year.

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