Are prices correctly reflecting macro drivers?
Today's news headlines:
- 'Sterling rises above $1.31 with Brexit talks in focus’. Yesterday, the Pound gained based on comments that suggested Brexit downside was being overplayed, and a report of constructive conversations between the government and opposition leaders. In morning trading, most of these gains have been erased. (Reuters)
- 'Euro's fortunes renewed as spring brings economic green shoots’. Improvements in Eurozone data such as Retail Sales and Industrial Production are winning out over ECB Chief Mario Draghi’s dovish rhetoric, leading to bullish forecasts for the second half of 2019. (Bloomberg)
- 'Dollar up as key global data awaited, Aussie hit by RBA's dovish tone’. The US Dollar is finding a degree of support as the market still seeks further assurances that the global economy has stabilised. Hints of a rate cut from Australia cause AUD to retreat. (Reuters)
In a sign of collective reassessment, quite a few commentators have expressed more positive views about the Euro outlook. Positive macroeconomic releases from the bloc have been subordinate to the European Central Bank’s (ECB) dovish rhetoric. While there are potential structural problems with the common currency and limited fiscal firepower for member states, any stimulus does really have to come from the ECB. As the positive data continues to come to the forefront, there’s a chance that the downside risks for EUR are being overplayed.
US Dollar safe-haven
Although there is some evidence that the global economic picture is improving, the prevailing mood remains one of risk-off, which explains the Dollar’s resilience. Further positive macroeconomic releases could, however, be sufficient to see risk appetite increase, with the potential to undermine the Greenback.
The Pound has been stuck in a one-cent range against the US Dollar for almost a week now. Brexit remains front of mind, although the Easter holiday is limiting the scope for political developments. However, today’s UK employment data may have the ability to provide fresh direction here.
Similarly, there’s been rangebound trading for the Euro against the US Dollar. The dovish tone from the ECB is limiting upside potential while fundamental data support is absent.
The Pound is struggling to find direction against the Euro as well. Macroeconomic releases in the coming days may offer some momentum here, but the potential for more lasting moves may well have to wait until next week, once the political narrative resumes in earnest.