Political noise slams Dollar as strong growth buoys stocks and commodities worldwide

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29 January 2018


Last week saw a continuation of the trends we have seen so far in 2018: a lower Dollar against most currencies, while risk assets in general rally and most stock markets worldwide hit record highs on a seemingly daily basis.

mong major currencies, Sterling and surprisingly the Swiss Franc led the charge higher. In the US, politics continued to overshadow strong growth data. The end of the Federal government shutdown was immediately followed by Treasury Secretary Mnuchin comments where he broke with US tradition and suggested that he likes to see the Dollar weaker. The ECB meeting caused a lot of volatility but the balance of optimism and caution in the communications ended up leaving the Euro roughly where it was prior to the press conference.

This week is packed with events that could well provide a floor for the Dollar after its recent struggles. Monday, PCE consumer inflation, a key input for Federal Reserve forecasts, could well surprise downcast expectations for a low number. Then Wednesday, the Fed meeting may provide some further optimistic comments about the US economy and the prospect for higher wages and inflation. Finally, the US payroll report on Friday is expected to provide further confirmation of the strength of the labor market. On the other side of the Atlantic, another disappointing Eurozone inflation number may lead to some Euro retracement.

Major currencies in detail


Sterling was buoyed by the strong labor market report, which showed steady but low unemployment at 4.3%, a welcome pick up in wages, and surprisingly high levels of job creation. Subdued economic growth, however, left intact longer term concerns about low productivity growth. However, over the short term, positive economic surprises, the prospect of early Bank of England hikes and softening Brexit rhetoric is having a tonic effect on the Pound, which is the best performing G10 currency so far this year save the Norwegian Krone.


The ECB and President Draghi had a generally dovish message last week. While stronger growth was acknowledged and celebrated, Draghi reiterated that inflation pressures are nowhere to be seen. Critically, he went as far as to state that, contrary to market expectations, the chances of a hike in rates this year are negligible. Nevertheless, currency markets reacted initially by sending the Euro to multi year highs, although the common currency ended up retracing all of its post-ECB gains on Friday.

This week’s key event will be the publication of the flash January inflation number. The market is assuming a modest improvement in the core number, to 1.0% annualized. We think there is a material chance for yet another month in which this key figure comes under 1%.


Chair Yellen last Federal Reserve meeting on Wednesday is unlikely to result in any major changes. We expect FOMC members to adjust their statement to reflect positive economic developments, and little more. Far more important will be Monday’s PCE inflation number and Friday’s payroll report for the month of January. As for the former, we think there is a good chance of a positive surprise in the core number that excludes volatile food and energy components. We also think the latter will surprise positively, particularly as regards annual wage increases, which we expect to come out at 2.7% annualized.