Major Currencies Review

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21 Apr 2017

USD (NEER) – The dollar failed to build on the rebound which began on the day after the sharp correction incurred on Tuesday, although it did manage to safeguard its recovery – albeit partial. As regards data, the April Philly Fed dropped as expected (albeit slightly more than forecast). However, this was a physiological decline which followed extraordinarily strong performances over previous months, therefore the baseline scenario for the US economy remains markedly favourable. Barring significant news on the economic and political fronts, the dollar should continue to struggle to resume upward momentum.

EUR – The euro, on the other hand, strengthened sharply, hitting at new high at close to EUR/USD 1.0780. However, the movement was not driven by fundamentals, but rather by short covering transactions, ahead of the first round of the presidential elections in France on Sunday. This is because the latest voting intention polls seem to indicate that Marine Le Pen is failing to gain further ground, caught between the strengthening/consolidation of Macron (in the lead by around 2%-3%) and the progress made by Fillon and Mélenchon (who are still trailing the Front National candidate, but now also only at a distance of around 2%-3%). For what concerns data releases, yesterday afternoon’s euro area consumer confidence, and this morning’s flash PMIs, both beat expectations, making progress – albeit limited – as opposed to expectations for stabilisation, thus offering support to the exchange rate. On condition of Le Pen not achieving a very strong result at Sunday’s election – which would cause the euro to shed all the ground gained over the past week – the single currency should manage to consolidate in the EUR/USD 1.07 area. After the French elections, the key appointment in the near term will be the ECB meeting next Thursday, mostly for the discussion it should bring on the timing and technicalities of exiting the monetary stimulus phase. At the June meeting, it should be in the position to remove guidance on rates, at least in terms of reference to the possibility of rates being cut from their present levels. Should the ECB decide to change its guidance already at next week’s meeting, the euro would benefit, and could return to the EUR/USD 1.08 mark.

GBP – Sterling mostly consolidated the gains scored following the calling of early elections announced on Tuesday, staying at around GBP/USD 1.2800 against the dollar, and in the EUR/GBP 0.83 area against the euro.

The chief Brexit negotiator for the EU, Michel Barnier, has made it known that negotiations will begin immediately after the elections on 8 June, and most importantly he reasserted that priority will be given to talks on safeguarding the rights of EU citizens legally residing in the United Kingdom (as also the rights of British citizens living in the EU). He added that on this

front, as also on that of the financial commitments to the EU balance sheet the United Kingdom will be called to honour (exit bill), an agreement must be reached by the end of this year. Barnier also specified that only once an agreement will have been reached on these two points, may talks begin on the new post-Brexit trade agreement, which Barnier expects to be very complex, and which could therefore overshoot the two-year deadline imposed by the Treaty.