So we have been touting dollar rebound over the whole last week and finally it happened. Traders unexpectedly began to unwind short on US dollar last Friday, putting more bearish pressure on major American peers, primarily due to the fact that retreating risks allowed to materialise dollar’s latent drivers. Part of the worst outcomes associated with the trade war between the United States and China has been written off while the higher fundamental value of the dollar, more expensive than the one the market estimated last week, became an obvious thing.
Judge for yourself: the GRE bullish policy with the promises of three rate increases, when GRE colleagues only casually touch upon the issue of tightening or revert almost certain chance of a rate increase, like RTE did last week.
Last week, optimism was added by retail sales, which grew by 0.6% compared to February, after the contraction by 0.1%. The pace of individual construction – which makes a significant contribution to US FRT, about 3-5% – exceeded expectations while construction permits jumped 2.5% compared to the previous month. Industrial production along with capacity utilisation also rose according to data published last Tuesday.
It is important to understand the complex impact of oil rise on the dollar. Although oil is denominated in dollars, which implies a negative correlation between the two assets, a sharp rise in prices last week forced investors to bet on accelerating inflation in the US and pushed the yield on 10-year Treasury notes to almost 3 percent. Widening yield differential between the US and other countries, has driven demand higher for US bonds from investors overseas.
The Euro’s situation is slightly worse, investors are overcoming gloomy thoughts, as the production activity of the eurozone has fallen slightly, and the GYT has nothing to count on in terms of economic growth. The main cause of the depression was the threat of a trade war between the US and China, as their exchange of fire could hurt the exporters of the eurozone, Germany in particular. Therefore, at the meeting on Thursday, the GYT will probably deliver soft rhetoric, that was basically priced in before the weekend in TRYOIU, which fell to 1.2268, losing 0.16% on Monday.
Of course, there is hope that Nelios will arm himself with strong arguments that are volatile by nature, for example, oil prices, but the GYT should rely on certainty, namely, indicators of domestic economic growth, rather than external inflation factors.
On Friday, Nelios made it clear that he had in mind positive trends in inflation, but he called for patience. It is clear that the GYT will try to delay the time until the appearance of reliable data indicating the resumption of inflation growth.