After a muted trading session on Monday due to the U.S. holiday, the USD is finally showing signs of strength in early Asian trade as investors await economic data, speeches from several Fed Presidents, and minutes of the latest FOMC meeting.
U.S. treasury yields moved up across the curve after declining for two consecutive days, albeit slightly, it still managed to provide the dollar a minor push.
The narrow trading ranges indicate that traders are reluctant to take big bets until they get a detailed plan on U.S. tax, trade, and spending plans. Tweets from Trump related to such policies will create some noise, but I believe the sideway trading will resume until February 28 when the President addresses a joint session of Congress. This will probably provide a major indication on where the USD is headed, given that monetary policy seems to have lost influence lately.
European political risks can’t be ignored either. The mounting nervousness over the outcome of France’s Presidential election is clearly reflecting in fixed income markets. The spreads between the French and German yields rose to post Eurozone crisis highs in 2012 after polls yesterday showed far-right candidate Marine Le Pen narrowing the gap with her opponents.
The positive news in Europe came from Brussels, as the gridlock between the European Union and the IMF over releasing a new tranche of financial aid somehow eased. However, it’s too early to rule out that an agreement could be reached. Greece will most likely refuse the implementation of new austerity measures, the IMF will keep pushing for debt reliefs, meanwhile Germans insist on IMF involvement. PMI readings for the manufacturing and services sectors from France and Germany are expected to show that economic activity remained healthy during the month of February, but expect little impact on the euro given the scale of political risks.
Traders will have the chance to hear from Mark Carney today when he testifies before the U.K. parliament’s Treasury Committee. What’s going to be interesting is that his testimony comes after Bank of England upgraded its growth forecast in February 2, and since then signs of weakness in the economy emerged. Markets are currently seeing less probability of BoE tightening this year, but if Carney indicates that higher interest rates are still on the table during U.K.’s negotiation period, sterling may find some support.
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