US politics pressures Dollar as short squeeze buoys Pound

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22 January 2018

Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

A holiday-shortened trading week in the US with few, if any, economic news of note had FX markets focused on politics.

his did the Dollar no favours, as it became increasingly clear that no agreement would be reached in the US Senate to keep the Federal Government running beyond Friday. However, the Euro did not profit much from Dollar weakness, and ended the week close to its starting levels.
The star performers were Sterling, up against every other G10 currency save the Australian Dollar and the Mexican Peso, the best performing major currency. The former was buoyed by increasingly positive reports from the Brexit negotiations, while the latter benefited from higher oil prices and the sense that the Trump administration is no closer to ending NAFTA.

This week is a busy one in the FX markets. The Bank of Japan (Tuesday) and the ECB (Thursday) will both be meeting. Additionally, we will be receiving the flash PMI business activity surveys from the Eurozone and fourth-quarter GDP from the US. Politics should also provide volatility on both sides of the Atlantic as we await word on an agreement to reopen the Federal Government in the US and also the potential announcement of a new Government in Germany.

Major currencies in detail


The bearish consensus that had developed against Sterling in 2017 continues to unravel. Markets are becoming more confident that the worst-case scenario to the Brexit negotiations that had been priced in is not all that likely. The statements by French President Macron suggesting that a ‘bespoke’ deal is desirable and possible should confirm this view.
The weak December retail sales numbers out last Friday somewhat cooled the Pound’s rally. We now look to this week’s labour data and GDP numbers to either confirm or deny the negative message from the retail sales numbers.


Last week was very light in terms of news from the Eurozone. The Euro traded in a very tight range against the US Dollar, as the Dollar-negative news of the US Federal Government shutdown more or less offset the lack of progress in the Grand Coalition government talks in Germany.

We go now into a critical week for the Euro. The ECB Governing Council meeting on Thursday will be the first chance for official institutional comment regarding the surge in the Euro so far in 2018. While the flash indices of business activity (PMI) should confirm the strength of the Eurozone economy, currency strength will do nothing to help bring inflation up towards the ECB’s target. December’s numbers were yet another significant disappointment, with core inflation stuck below 1% and no sign of an upward trend. In any case, we expect significant volatility around the announcement and press conference on Thursday afternoon.


This week’s key economic release, the first estimate of fourth-quarter GDP growth, does not come out until Friday. Therefore, Dollar traders will spend the week following political developments around the Federal Government shutdown. The GDP number, however, should provide a positive surprise, well in excess of 3% on the back of strong consumption and investment. We think good news on this front and any resolution of the political standoff could fuel at least a short-term counter trend rally in the greenback, given how stretched traders bullish bets on the Euro have become.