Dollar soars against every G10 currency while weak GDP data hinders on Sterling

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30 April 2018

thomasdodds

The Dollar found its stride and broke through the bottom of its recent soar against the Euro. However, it is difficult to pin the move on a single cause.

I
t seemed like upside surprises in second-tier economic data out of the US was enough to spook stale short positions and push the Dollar higher against every G10 and major emerging market currency. The Turkish lira was an idiosyncratic exception to this move, ending the week at the top, after a big hike in rates from Turkey’s central bank.

Next week provides a rich mix of economic and policy news. In addition to the Federal Reserve meeting on Wednesday, we have central bank meetings in Australia (Tuesday) and Norway (Thursday). The two key data events for the week will be the Eurozone flash inflation for April (Thursday) and the monthly payroll report out from the US on Thursday.

Major currencies in detail

GBP

Expectations for a May hike in Bank of England rates were mostly unwound last week after a weak initial report on GDP growth for the first quarter. Annual growth fell from 1.4%, in the previous quarter, to 1.2% – the weakest among major economic areas. While there was not much detail, we expect the weakness to prove temporary and be fully unwound by next quarter. Consequently, recent Sterling depreciation is looking rather excessive and there’s potential of a bounce, particularly against the Euro.

EUR

The ECB April meeting last week turned out to be a complete non-event. The Council and President Draghi both did their level best to avoid delivering any new information on their outlook on rates. The statement was essentially a copy of the one from the previous meeting and no forecasts were released. The flash PMI indices of business activity for April also showed no significant change from the previous month. This left the Euro at the mercy of fear of higher rates in the US, and the still massively long position that traders have on the currency continued to unwind, bringing the common currency below its range for the last few weeks.

USD

Most economic indicators last week surged to the upside in the US. The most important was the first-quarter GDP growth, going up 2.3% in annualized terms. US 10 year treasury yields, however, were not able to stay above the 3%. Dollar shorts continued covering their positions and buoyed the Dollar above its recent ranges. Upward pressure on the greenback is unlikely to abate this week. We expect the FOMC to reiterate its message from the previous meeting, that the combination of strong economic data and fiscal stimulus continues to warrant higher rates. On Friday, the April Payrolls report should deliver more good news in terms of job creation and wage increases.