US Dollar recovers after pause in rally on higher US yields

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15 May 2018

thomasdodds

The recent rally in the US Dollar against the Euro reasserted itself on Monday afternoon, as a rise in US yields helped the greenback bounce back after a brief pause in its recent rally.

S
ome investors have begun to fret in the past few sessions that the recent bounce in the US Dollar may be slightly overdone. Last week’s soft US inflation, and the previous week’s slightly below par nonfarm payrolls report, cooled expectations of seeing up to four interest rate hikes from the Federal Reserve this year. A rise in US Treasury yields did, however, overshadow these concerns, sending the greenback higher for the day.

The market took a relatively relaxed view over the possibility that Luigi Di Mario’s Five Star Party will form a coalition government with Matteo Salvini’s The League in Italy, following further talks on Monday. While both parties have, in the past, called for a referendum on EU membership, these concerns have abated, and it is likely that such a government would lead to nothing worse than a modestly larger deficit.

Today looks set to be a fairly hectic day in the currency markets, with a number of major economic data releases on the docket. Euro traders will look to this morning’s revised first quarter growth data so see if the Eurozone economy expanded at a faster pace than the 0.4% originally pencilled in. This afternoon’s US retail sales data could also prove a market mover for EUR/USD, and is expected to show that sales growth eased to 0.3% in April.

Sterling extends slide, UK labour report in line with expectations

Sterling continued to lose ground against the US Dollar this morning, falling perilously close to the 1.35 mark as discussions over Brexit rumble on. Foreign Minister, Boris Johnson, appeared to back away from his calls to pursue a customs union, instead siding on Theresa May’s stance that would see Britain collect tariffs on behalf of the EU in order to ensure that trade with the bloc continues. This has reignited concerns among some investors that fear the UK could be heading towards a ‘hard Brexit’.

Last week’s fairly dovish assessment from the Bank of England is still ringing in currency traders ears. With the bank firmly in a ‘data-dependent’ mode with regards to future policy tightening, data releases in the coming weeks take on added importance. This morning’s UK labour report was therefore cited as key for Sterling today. It did, however, come bang in line with expectations, and market reaction was consequently limited. Average earnings excluding bonuses increased to 2.9% in March, its highest level since August 2015.