MAJORS: New Record Highs and Lows

MAJORS, New Record, Highs and Lows, Fundamental Analysis, fx trader, forex

29 Mar 2017

● USD (NEER) – The dollar opened the week with a sharp correction, following the Trump administration’s failure on the front of healthcare reform on Friday. The repeal of Obamacare is now off the political agenda and, this week, focus will be on the tax reform. Trump’s failure to live up to one of his key electoral campaign promises casts doubts on the new president’s ability to effectively implement the promised reforms, and at present focus is in particular on the fiscal stimulus plan. However, although the setback on the healthcare reform lays bare Trump’s difficulties in making sufficient consensus gel on the most controversial issues, even within his own Republican party, House speaker Ryan assured “this does make tax reform more difficult, but it does not in any way make it impossible”.

● With Monday’s correction, the dollar hit new lows for 2017, revisiting levels abandoned a few days after Trump’s victory in November. Lacking especially favourable input from data, and tangible developments on the fiscal front, in the very near term the dollar could stay on the defensive. Several FOMC participants are due to speak, including Chair Yellen. In the meantime, Evans confirmed the appropriateness of three rate hikes in total this year, while also stressing that uncertainty remains high, especially on fiscal policy, therefore the number of increases is not predetermined. Kaplan also confirmed that the growth outlook is markedly positive, although he reasserted the importance of maintaining a gradual approach in hiking rates.

● EUR – On the widespread retreat of the dollar, the euro hit a new high for 2017 at EUR/USD 1.0906, returning to levels abandoned a few days following Trump’s victory. The strengthening of the single currency is made more solid by positive news flows from the euro area. The German IFO index surprised on the upside, consolidating expectations of a slight acceleration in economic growth in the area in 1Q 2017. Lautenschlaeger, of the ECB, said that the exit strategy must be properly reviewed.

● The prospect of the ECB preparing to terminate the extended period of accommodative monetary policy this year is the main pillar supporting our baseline scenario, which contemplates a gradual underlying strengthening of the euro on a 12-month horizon. In the shorter term, however, on a 1m-3m horizon, the exchange rate should retrace slightly from the new highs hits in the past few days, as the next fed funds rate find should in any case come already in June.

● GBP – Sterling also capitalised on the widespread retreat of the dollar, hitting a new high at GBP/USD 1.2615. The movement was in any case smaller than the euro’s, against which the pound stayed in the EUR/GBP 0.86 area as a result. Upside on the UK currency is being limited by uncertainty tied to Brexit.