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The dollar continues to come under selling pressure with the euro being the main beneficiary. Earlier today the EURUSD hit its highest level since 9th November - just after Donald Trump clinched victory in the US presidential election. The latest round of dollar selling follows allegations that President Trump disclosed classified information to Russian officials during a White House meeting last week. Trump has insisted that he had every right to share facts “pertaining to terrorism and airline flight safety.” But the controversy comes hot on the heels of Trump’s sacking of FBI Director James Comey which some commentators say is part of a cover-up into the president’s Russian dealings. Overall, Trump is coming under pressure, rightly or wrongly, and this is preventing him from getting on with the business of pushing through his campaign promises for fiscal stimulus. Even worse, there are suggestions that a number of parties are determined to get him out of the White House which would mean impeachment. This is all starting to look like a concerted campaign to discredit Trump, although it’s fair to say that he hasn’t done himself any favours with his tweets and outbursts.  

But it’s not all about the dollar as the euro is also back in favour. Politically, there’s been a wave of relief that far-right parties were defeated in Dutch and French elections. Also, regional elections last weekend showed that German Chancellor Merkel still has plenty of support, despite recent difficulties. For now, much of the risk associated with holding the euro has subsided. On top of this, recent growth numbers from the Euro zone have been highly encouraging and inflation is picking up. This is putting pressure on Mario Draghi and the ECB Governing Council to start tightening monetary policy. Many traders expect the EURUSD to make further gains helped by a wave of short-covering and stop-losses above 1.1000.

This could be the case, but it’s worth considering that Mario Draghi has only just stated that it’s too soon to start winding down the central bank’s bond purchase programme. Against this, the US Fed has already taken its first steps in normalising monetary policy. And with the yield on the US 10-year Treasury still above 2.30% while the corresponding German Bund yield is 0.42%, the dollar does have a compelling attraction. Of course, it could be argued that the Fed is tightening into weakness as recent US economic data has been less than stellar. It is probably this fear which has seen the greenback decline sharply ever since it hit a 14-year high against the euro and the basket of currencies in the Dollar Index at the beginning of this year.

It’s also worth noting that there’s still a gap in the EURUSD chart going back to the first round in the French presidential election. So while the momentum suggests the EURUSD could have further to go on the upside, it may not be plain-sailing. There’s certainly a chance that the gap gets filled, but when that may happen is anyone’s guess.

https://www.spreadco.com/assets/pm16.05.17.png

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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