Let us state the obvious, US Dollar bulls have been suffocating over last few weeks. The recent correction in US dollar index, which fell nearly 4% in last four weeks, is due to political drama across the ocean. Cable surged nearly 4 big figures as May announced mid-term election in UK. Market seems to believe that upcoming election will provide stronger mandate to May, which might lead to better Brexit bargain for UK. On other hand, EUR/USD pair surged above 1.09 handle as Macron won the first round election in France and likely to win second round against Le Pen.
Weak Data Points
US dollar has found little support from recent US economic numbers. US GDP grew by just 0.7% in Q1 owing weak consumer spending and seasonal headwinds. Other key indicators retail sales – declined by 0.2% m-on-m, CPI inflation eased to 2.4% y-o-y, consumer confidence slipped to 120.3, remained under pressure.Key Trigger: Balance Sheet Reduction
Most of FED members had started toying with idea of reducing US FED balance sheet, which is currently nearly 4.84 trillion USD. Interestingly, US FED member Neel Kashkari had argued to normalize FED balance sheet rather than adjusting FED fund rate as tool for monetary policy adjustment.It is note-worthy that much of FED’s hawkish inflation expectation are/were due to Trump’s tax reforms talks. With US tax reforms still in dark and softness of recent economic numbers, there is further room for FED to remain accommodating. Hence, for US Dollar bulls – any clarity over reduction of FED balance sheet might be only hope!
First Published on 3rd May 2017.
Source- Bloomberg , Trading View
