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Prospect of trade wars drive dollar higher

Today’s macro highlights:

  • EUR - ECB Forum on Central Banking (Final session)
  • USD - Existing Home Sales (May)

Prospect of trade wars drive dollar higher

Fresh economic data remains thin on the ground as the week continues, but it’s the prospect of a US-lead global trade war which is dominating the agenda for now. The dollar continues to push out to fresh highs, fuelled in part by a flow of money from global equities into the safe haven of US$ denominated debt. Downside pressures have been exacerbated on the Euro in the wake of Mario Draghi’s comments at the ECB forum yesterday which served to reinforce the ECB’s dovish view over monetary policy, as QE could even be extended beyond the proposed December conclusion, apparently. On top of this, the ongoing political uncertainty in the UK surrounding wrangling amongst politicians over Brexit negotiations is ensuring there’s little to cheer for the Pound, either.

It’s difficult to see how the ECB can put much more on the table at the Sintra conference, which concludes today, but there’s a Policy Panel of high profile central bankers due to start at 2.30pm BST which could prove telling. Australia, Japan, the USA and the Eurozone are all represented at the highest level, so in the absence of fundamental data from elsewhere, the information here will be worth watching. Any indication as to how trade wars may manifest themselves in terms of monetary policy could well provide some fresh direction for markets - again, there’s some speculation that the greenback’s rise is also being fuelled by import tariffs having the potential to keep boosting inflation.

There are some more housing stats out of the US today although these are unlikely to have sufficient weight to provide any pull against the safe haven appeal of the dollar. So far this week, numbers from the sector have perhaps been a little softer than anticipated, but not to any major degree. However the idea that US interest rates will continue to rise through 2019 - possibly more aggressively than had been expected if trade tariffs kick in - could further soften demand right across the construction industry.

Brexit is back on the agenda in the House of Commons today, so Theresa May can expect another rough ride here. Any question marks over leadership would hit the Pound once again, whilst a little further ahead we have the Bank of England’s MPC verdict tomorrow. We’re not expecting any change in policy to be announced, but we do have the scope for further clues as to how likely a hike will be in August. The risk is that if rates remain low, stimulating the economy through the next downturn will be especially damaging for the Pound.

The pair continues to work its way lower and unless we see some meaningful signal from the Bank of England today over tighter monetary policy, it’s difficult to see this ongoing trend from being broken. 

Dovish comments from Mario Draghi yesterday produced only limited downside pressure for the pair, although the Euro clearly took a pummelling last Thursday in the wake of the ECB’s message. The dollar’s safe haven appeal will however prevail so long as the talk of trade threats remains. 

Sterling continues to give back last week’s gains and were fast approaching the levels set ahead of the ECB’s comments last Thursday. There’s little the pair seems to be able to do to break out of the two cent range of the last couple of months, although in the longer term some divergence over monetary policy could provide more meaningful direction.