Tags: Dollar | euro | Strength | investors

Dollar on Path to Gain Even More Strength Against Euro

Dollar on Path to Gain Even More Strength Against Euro

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Monday, 12 June 2017 09:16 AM Current | Bio | Archive

Leaving the U.S. political chatter alone for a moment, the event of the week will without any doubt be Wednesday’s decision by the Federal Open Market Committee (FOMC) to raise, as is widely expected, the Fed funds rate by 0.25 percent to a range of 1.00 – 1.25 percent.

Because recent Fed speak has clearly downplayed the soft GDP growth data of Q1 and the fact that many at the Fed seemingly consider the recent soft inflation data as transitory, I still think we’ll have 3 rate hikes this year.

The only thing at this moment that could upset this is if the consumer price inflation (CPI) report for May we’ll get on Wednesday comes in well below the 1.9 percent figure we got for April. 

There is no doubt that Wednesday’s press conference by Fed Chair Janet Yellen (as well as the Fed’s own summary of economic projections) should be interesting.

Talking for a moment about the FOMC’s “dot plot” estimates, I still believe that the FOMC’s “median” interest rates projections of the fed funds rate over the period from the end of 2017 and into 2018 shouldn’t change, which is consistent with three rate hikes in 2017 and as three in 2018.

In case we should get a lower CPI number Wednesday, then I think the Fed’s forward guidance could change to a slower tightening pace than was signaled so far.

What is for sure is the fact that Fed has definitively entered its tightening cycle. I still consider the Fed as being behind the curve, while the second most important central bank, the ECB remains, at least for the time being, in its “easing cycle.”

For investors, this is important because if the divergence between U.S. and Euro area interest rates should continue, one day that will be reflected in a stronger exchange rate of the dollar against the euro.

Nonetheless, if the better political news we got out of Europe continues, then the divergence story could come earlier to an end than is now factored in, and, of course, a lot will also depend on when President’s Trump tax reform will finally take place, which for the moment remains an important unanswered question.

All this brings us to European politics that in fact lead the headlines today with the aftermath of elections in France, Italy and the UK, all playing their role.

In France, President Macron’s party appears set to gain a majority in the National Assembly.

The first round of the French Assembly elections saw Macron’s candidates gain 32 percent of the vote. The second round is due next Sunday.

Not since General De Gaulle ’s political party, the Union for the New Republic (Union pour la nouvelle république or UNR) has a political party gained governmental ground so quickly.

President Macron could possibly obtain the largest majority next weekend in the history of 5th Republic that by the way was established by General de Gaulle in October 1958.

If that would be the case, which is completely possible, then a lot more credibility should be given to President Macron’s reform programs, in particular to the ever-controversial area of labor market reform.

In Italy, local elections took place on Sunday in several key-cities representing around 20 percent of the electorate. None of them are necessarily that significant of themselves, but the populist five-star movement failed to gain control in any of them. Italy is set to have parliamentary elections within a year and the support for five-star has been a concern for investors.

Both events in France and Italy may be read as favorably for investors who have been nervous about the prospects of another anti-establishment party at a national level in Italy.

In the UK, Prime Minister May faces the Conservative Party’s members of parliament against the backdrop of media speculation about a leadership challenge.

Investors could do well taking note that changing the leadership of the Conservative Party would not necessarily resolve the divisions within the party over Europe by keeping in mind that the opposition Labor Party’s “shadow” Chancellor John McDonnell stated in February this year that there was no option but to leave the EU single marketmeaning there is neither of the 2main parties in favor of remaining in the EU.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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For investors, this is important because if the divergence between U.S. and Euro area interest rates should continue, one day that will be reflected in a stronger exchange rate of the dollar against the euro.
Dollar, euro, Strength, investors
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2017-16-12
Monday, 12 June 2017 09:16 AM
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