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Is the Dollar rally running out of steam?

Today’s macro highlights:

  • EUR - Eurozone Trade Balance (March)
  • USD - Assorted comments from FOMC members

Is the Dollar rally running out of steam?

Although US treasury yields continue to work their way higher, support for the dollar appears to be floundering. Both cable and EUR/USD spent most of yesterday’s session stuck in a very tight channel and what limited data we did see released could be best described as inconclusive. US initial weekly jobless claims came in fractionally higher than had been expected but the ‘Philly Fed’ business outlook survey was surging ahead. Next week’s FOMC meeting minutes are going to be keenly anticipated, as any suggestion that the Federal Reserve is going to take a softer line over interest rate policy could see an unwinding both of the greenback and those bumper US yields. For now however it seems to be a case of the market not knowing which way to turn.

Eurozone trade balance data at 10am BST will likely attract some interest this morning in what will be an otherwise relatively quiet session for data. The comparatively weak Euro should continue to provide support here, although with the US being the Eurozone’s largest trading partner buy some margin, changing purchasing habits across the Atlantic could well serve to knock this figure.

We also have a string of comments from FOMC members spread across the course of the day. In isolation, these statements would typically hold little impact for the market but given the growing focus on next week’s release of the meeting minutes - plus the fact we’re seeing some softening data come through from the US - anything that can be interpreted as being ‘dovish’ towards US interest rate policy has the potential to unwind some of the recent dollar gains.

There has been some progress with regard to Brexit and last night the UK government declared it had established a fall-back position if the two sides can’t reach agreement on their preferred customs arrangements. Whilst this could be seen as a defeatist approach - and still needs to be accepted by the remainder of the EU - it does start to remove some of the uncertainty. However, if this throws open new political divisions in government, a fresh swathe of questions could end up on the table with regard to Theresa May’s future as Prime Minister - something that would again have the potential to pressure Sterling.

Over the last 24 hours, cable has been stuck in a half a cent range, with no signs of breaking away from the 1.35 level. Markets really need some fresh direction here and with no meaningful UK data due today, the short-term risk could well be on the upside. A return to two-week highs around 1.36 may be feasible, but gains beyond this may prove difficult to find.

Another rangebound performance for the pair, which continues to sit close to lows for the year. Again, the short term potential is likely on the upside as confidence in the US economy can arguably only fall from where it is today. A retest of the May highs around 1.20 could be seen.

The run higher that we’ve seen for the pair over the last week has now stalled. However, it’s worth nothing that GBP/EUR is still above the level posted before the downbeat UK growth forecasts were published. On the basis that nothing has changed in terms of the economic outlook, risk could be on the downside here especially if Eurozone trade figures impress.