US Dollar Firms after Fed’s Minutes, The Latvian Crisis and the British Pound Strength

• US inflation came in above the 2% FED target last week, however, the Dollar remained weak, what do you expect to see next for the greenback?

There’s been a lot of talk of inflationary pressures building at the turn of the year, with headline inflation accelerating according to the January figures released last week. In spite of the pickup, core inflation and the FED’s preferred Core PCE Price Index numbers have not reflected an acceleration with the annual rate of inflation holding steady, when looking at baseline numbers.

Yields responded to the headline numbers however and the FOMC meeting minutes released on Wednesday added to the upside in the U.S Dollar.

Economic projections have been revised upwards by members of the Committee, with members also viewing the Tax Reform Bill as favorable to consumer consumption.

The markets considered the latest minutes alongside wage growth and the inflation figures that were released after the FOMC meeting at the end of January.

With the economic outlook continuing to be positive and the FOMC economic projections expected to see upward revisions when released next month, the markets will need to pencil in a 4^th rate hike, which has been talked about in recent weeks.

One negative for the Dollar remains the issue of government debt and any fall in demand for U.S notes during auctions. While we don’t expect this to be an issue in the near-term, any shift in demand for government bonds towards Europe and Asia and the Dollar could fall under significant pressure.

So for now, it’s likely to hinge on the March FOMC economic projections and the rate path that Committee members map out for this year, which should be Dollar positive near-term.

• The crisis in Latvia has caused problems for the ECB this week, what issues do you expect this to cause for Draghi and co. moving forward?

I don’t think that this should cause Draghi and the ECB any major issues other than some degree of embarrassment. The latest scandal is another example of the issues faced in the Eurozone, where individual member states maintain control at the national level when it comes to certain areas of oversight.

The very fact that national governments and central banks are unlikely to escalate any incidents of illegal activity, with no centralized body in place to handle anti-money laundering issues and illegal activities raise a bigger question that the European Parliament may need to address.

On top of that, the Latvian central bank governor’s position within the ECB is an automatic process and not one of selection, with Latvia’s inclusion into the Eurozone leading to Governor Rimsevics inclusion within the ECB’s council.

The greatest embarrassment will be the fact that the U.S was able to identify the illegal activity that was taking place under the noses of the ECB and the EU, but there are some questions around how the U.S actually became aware of the activity.

Until there are greater centralization and control in Brussels, the risk of such events recurring remain high and current governments continue to face a backlash from voters on national identity, so we won’t expect governments and national central banks to hand oversight to Brussels anytime soon.

• With some positive Data out of the UK, and the EU suggesting a more flexible approach to trade talks have helped the GBP this week, what will be the key to continued GBP strength in the coming months?

Data out of the UK has been relatively upbeat when considering the doomsday outlook that economists had predicted in the wake of the EU Referendum.

As Carney pointed out during the inflation report hearings on Wednesday, the financial markets have begun to respond to macroeconomic data again, with the Pound having previously been driven by Brexit and domestic political noise.

On Wednesday, we saw the unemployment rate rise, which weighed on the Pound in spite of the positive sentiment towards Brexit and a likely favorable agreement on the transition dates and trade, albeit on paper.

Sentiment towards Brexit has led to the shift in market focus, though much will depend on the final outcome of transition and trade negotiations that kick off next month.

If all goes well, that will likely lead to a green light for the BoE to lift rates in May, which would certainly be a positive for the Pound. So, while the Pound has begun to respond to the data, it’s going to boil down to next months talks.