Dollar strengthens; Euro consolidating after posting a 6-month high; Sterling drops on polls

Dollar strengthens; Euro consolidating after posting a 6-month high; Sterling drops on polls

Posted on Monday, May 29 2017 at 4:20 pm GMT+0000

Dollar strengthens

The dollar was boosted by improved US economic data, particularly by an upbeat US GDP that was revised to 1.2% from 0.7%, beating forecasts of 0.3%, as well as other economic releases that are raising the probability of a rate hike at the June FOMC meeting.

The second reason is Trump’s tax cuts commentary. He pointed out via Twitter that the tax reform plan is receiving the required support and is taking the right path towards its adoption soon. And in spite of the lack of alternative financing sources, markets are reacting positively to this news.

The most important motive was the Fed speakers’ commentaries and the intention to cut the bond purchase budget at the end of the year.


Euro consolidating after posting a 6-month high

The euro continued its downside move that was started at the end of last week from a six-month high due to some profit-taking.

In addition to that, broadly stronger dollar on Friday weighted on the Euro. Technically, I see signs of weakness in the near term, and expect the decline to continue towards 1.1120 and then 1.1040, awaiting new developments in the Brexit negotiations next month.

In the long term, I expect the Euro remain Bullish due to several factors that are backing the single currency. First, the improvement of inflation and abating deflationary risk, secondly abating political risk in the region, and thirdly the tension of European-American relations, which in my opinion might lead to a German-French re-rapprochement, especially if the new French president can implement job reform and growth in the French labor market. This could significantly increase the European growth rate.


Sterling drops on polls

Sterling fell nearly 300 pips from last week’s high, driven by the dollar’s strength, and a recent poll showing UK Prime Minister Theresa May’s lead was falling.

A few days away from the British elections, the polls are the main driver of the markets this week. Recent polls showed Prime Minister Theresa May’s Conservatives with a 5-point lead ahead of the Labor Party.

With Teresa May calling for elections in April as an attempt to get the absolute political majority that will support her lead the process of negotiations effectively, boosting by that the pound last month. The reduction of the Conservative party’s leadership would affect the future of the negotiations process and the weight on the pound. In addition to that, the victory of the Scottish National Party will promote a second referendum for the secession of Scotland from the UK, and will have a very negative impact on the pound.