Fed claims US economy back to normal; dollar posts muted response.

Our prop desk is making good progress with some long Aussie dollar positions, whilst those long USD/CHF trades from earlier in the week also remain in play. There’s still some expectation that equity indices have further to fall with S&P shorts remaining open, but attempts to see further gains for EUR/USD have fallen short.

Daily round up

We have a relatively subdued day ahead as the month and quarter ends both sweep into focus. The data we do have scheduled for release is mostly low-key so beyond seasonal position keeping, traders could be left struggling to find fresh direction in the short term. Gold prices have seen a little weakness off the back of the recent run of dollar strength, although US treasury yields haven’t perhaps reacted in quite as upbeat a way as would have been expected in light of the Fed’s rousing call over economic recovery.

Fundamental Analysis – Fed claims US economy back to normal; dollar posts muted response.


The dollar index may have nudged back above the 100 mark during yesterday’s session but given this comes against the backdrop of a bold claim by the Federal Reserve that the US economy is – after nine years – back to normal, a little more enthusiasm could have perhaps been expected. We have the final US Q4 GDP reading due at 1.30pm GMT this afternoon so the expectation would have to be that this will reflect the upbeat sentiments from the Fed with a 2% growth figure being forecast. Any shortfall here could stand to leave the dollar looking exposed however – with the market not looking all that excited over the Fed’s claims of normality, any excuse to book profits heading into the quarter end could well be jumped upon.

EUR/USD is now 150 points lower than the highs we saw hit at the start of the week and further downside pressure could be on the cards when German inflation data is released at 1pm GMT today. There’s an expectation that this figure will fall back below the 2% mark, playing to Mario Draghi’s idea that inflationary pressures would be short lived and with oil prices on the back foot this certainly makes sense. However it also backs the policy doves at the ECB and suggests that keeping interest rates lower for longer is still necessary to allow the Eurozone economy time to recover.

EUR/GBP reacted again yesterday to the Brexit process with support for the pound coming through off the conciliatory tone that was struck from both sides as the difficult process of negotiating the divorce gets underway. Neither Donald Tusk nor Jean-Claude Juncker saw yesterday as anything more than a failure of the Union to accommodate the changing landscape of member nations – the time for finger pointing is over and it’s now about shaping how the two entities will work together from 2019 onwards.

US equity indices have recovered from the sell-off in the wake of Donald Trump’s failure to reform healthcare, with the market throwing its faith behind tax breaks, but the clock is certainly ticking here with lawmakers needing to agree on US budget plans by the end of next month. Valuations remain inflated and there’s plenty of profits to be taken, so any hint that either the tax reform won’t be passed or that the government will run into a deadlock over the budget has the potential again to lead a reversion here. It just seems that repeatedly these markets are bouncing straight back.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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