The US dollar ended last week on the defensive with EURUSD having slowly crawled away from the prior week’s post-European Central Bank downside break all week long. Elsewhere, the USD has eased lower in anticipation of a crystallisation of the Federal Reserve’s dovish shift as the market looks for a set of “accompanying materials” this week that point to fewer rate hikes for this year in particular, but also some indication on what would provide a net policy easing.
Given how far expectations have shifted and the degree to which asset markets have rejoiced over the Fed’s dovish turn, the bar is somewhat high for a dovish surprise. The most obvious dovish signal, an aggressive signal on the QT schedule aside, would be the expectation of no further rate increases for the balance of 2019. The flipside of a high bar for a dovish surprise is that it would be very easy, if unlikely, for the Fed to insist on two-way guidance, i.e. reserving the ability to hike rates if the outlook from here strengthens again, especially now that the immediate threat of financial market instability tail risks wagging the economic dog have so thoroughly faded.
Shorting EURNOK is still a theme, though we prefer looking for selling upticks with half a position ahead of Thursday’s Norges Bank meeting.
USD looks increasingly tradeable for further tactical weakening, perhaps via EURUSD and AUDUSD, but there are obvious large risks around the FOMC meeting on Wednesday.
The FOMC meeting aside, this week will also prove potentially pivotal for Brexit, as PM May guns for a final vote on her deal either tomorrow or Wednesday, with no vote to be held if it is clear that the ballot will face a defeat. The latest focus is not just on the Eurosceptic Tories, who may fear that they never achieve Brexit at all if this deal doesn’t pass, but also on the critical DUP votes, as legal opinions swirl on the UK’s options on the backstop issue.
If PM May can deliver Brexit over the next couple of days, it should provide sterling with an immediate and large boost as this clears away the majority of near-term uncertainty, even if the Labour opposition may try to move to call for a referendum on the deal. The alternative of May’s deal not passing will likely lead to a long day and protracted further uncertainty that doesn’t provide a clear signal for sterling. Certainly, May’s days are numbered if she fails to deliver this week.
EURUSD has thoroughly reversed the downside break attempt, but needs to rally beyond this Wednesday’s FOMC hurdle to deserve additional focus from bulls. Note the descending trendline; it would be helpful for upside potential to see a boost in the Eurozone flash PMI numbers this Friday.