The Dollar’s appreciation appeared to have lost momentum but has staged an impressive recovery in the past 72 hours and the Dollar is now at its strongest since mid-2017. Markets still do not seem convinced that there are many better macro stories or currencies to hold at this juncture than the US and Dollar. Today’s release of April data for the robust US housing market (including building permits and housing starts) and industrial output are unlikely to trouble markets or the Federal Reserve.
The Euro, which was the poster-currency in the second half of 2017, continues to trade broadly sideways on a basket basis. But EUR/USD is down to 1.18 with the Euro seemingly hurt by German ZEW business climate data for May suggesting that the German economic growth continued to slow in Q2.
The Euro has also lost ground against Sterling with markets seemingly encouraged by UK labour market data out yesterday showing that real wages rose in March, albeit very slowly. The stagnation of real wages in the past three years, despite the rapid rise in employment, has been a concern to both the Bank of England and Theresa May’s government. BoE Governor Carney referred to the lack of inflationary wage-pressures in his press conference last week to justify the central bank’s decision to keep its policy rate unchanged at 0.50%.
However, Governor Carney and the BoE still seem intent on hiking rates before year-end and FX and rates markets are likely to seize any sign, however tentative, that UK economic growth may be bottoming out. This feels a bit like February-March when markets became increasingly convinced that decent UK data justified a rate hike in May…only for those expectations to be quickly dashed.
