USD Holds On To Weekly Gains, Lower Brexit Woes Do Not Help the GBP

May 20, 2016 (Tempus, Inc.) – The U.S. Dollar sustained most of its gains after an eventful week in which the chances of a Fed hike have significantly increased. The FOMC minutes revealed an unexpectedly hawkish Fed willing to tighten monetary policy if the economic situation stays on the current path. Consumption and global performance will be closely monitored, but traders are more confident about the probability of Fed action moving forward.

As a result, the mighty “buck” is on a positive trend. The Bloomberg Dollar Spot Index is up 1.0% already this week. The dollar’s appreciation is also due to a major contrast in the economic realities of the anemic European recovery and the slowdown in Asia, primarily in China.
Global equity indexes rallied overnight with mining companies improving the most. What goes down eventually goes up as is the case with metals such as copper, nickel, and aluminum. The recovery in the price of natural resources and other commodities, like oil, stopped the bleeding in emerging-market currencies. For example, NZD has lost 3.6% of its value since the start of May and CAD is 4.6% weaker as well.
Existing Home sales will be the only major piece of data out at 10AM today. A slew of data is expected for next week, including the much-anticipated Gross Domestic Product.
The Euro lost over 1.0% of its value this week and is trading around levels last seen at the start of April. German Producer Price Index only increased by 0.1% since last month, but the figure is negative year-over-year at (-3.1%), casting doubt on the Euro-zone’s ability to overcome deflationary pressures.
We expect the Euro to continue facing downward pressure as major economies within the union deal with uncertainty. Along with political turmoil, the Euro-zone is facing scrutiny over its handling of debt resolution and the lack of fiscal consensus within its more troubled members.

The Pound weakened for the first time this week following statements from Bank of England officials in regards to the underperformance of the U.K. economy. Although “Brexit” fears are starting to fade, the BOE officials credited the poor economic situation to other risks beyond the possibility of the U.K. leaving the EU.

Policymaker Gertjan Vlieghe explained that the current slump is creating a need for stimulus down the line, countering the argument that the BOE is the only major central bank other than the Fed that could hike interest rates.

The Pound fell to a seven-year low back on February 26th when the referendum was announced, but managed to recover 5.0% of its value since then and is no longer the worst-performing major currency in 2016.



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