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UER and GBP broadly higher amid tightening rumour
EUR and global equities better bid as risk sentiment improves
The single currency continues to climb higher amid anticipations for tighter monetary policy in the Eurozone and in UK. Investors were absolutely not disrupted by Draghi and Carney‘s apparent communication shambles on monetary policy earlier this week. Indeed, both central bankers made some hawkish comments - or interpreted as such by investors - suggesting the era of ultra-lose monetary policy is coming to an end.
Draghi’s optimistic comments about the inflation outlook led investors to believe the ECB was about to start the process of tapering its bond buying program. EUR/USD hit 1.1435 on Thursday morning, the highest level since June 2016. The move was also exacerbated by a broad USD weakness that sent the dollar index to 95.68.
Across the Atlantic, the pound sterling was buoyed amid Mark Carney’s comments about a potential tightening in borrowing costs in the event of a sharp pick-up in business investment. GBP/USD surged 1.20% to 1.2970 yesterday and consolidated around this threshold during the Asian session.
On Thursday morning, the US dollar continued to lose ground as investors started to finally understand that President Trump’s economic boost will remain at the draft stage. The NOK, AUD and SEK stood amongst the best performer and rose 0.62%, 0.48% and 0.58% respectively. The Japanese yen was the only G10 currency to edge lower amid broad risk-taking mood.
Trump target of 3% growth looks less and less unattainable
Fed members look concerned by the level of equities. San Francisco Fed President John Williams declared recently that the stock market is “running on fumes” while Janet Yellen said that current stock valuation levels are “rich”. Both declarations have been made at separate moments and it is clear the Fed underpinned stocks overvaluation.
Our overview of the US economy is bearish and markets expect today’s Q1 GDP to be released at 1.2% q/q. We believe that fundamentals are still soft and we consider the US recovery to be overestimated at the moment.
On top of that, the IMF in a report has slashed its GDP forecast for year-end by removing the effect of President Trump’s fiscal stimulus. Indeed, it looks more and more uncertain that this fiscal plan will ever be implemented at this point. The IMF forecast for US GDP is now 2.1% from 2.3% in April. As a result the Trump target of 3% growth looks less and less unattainable.
Currency-wise, there is room for further weakness for the greenback. The Eurodollar pair, which has strengthened out of Draghi’s comments, should continue heading higher on markets pricing back in US economic difficulties.