What A Week! EUR USD & More

• The euro steadied this week after a tough start to the week, what do you expect to see next from the ECB, are we likely to see a rate hike anytime soon?
  

The chances of a rate hike by the end of next year had fallen to its lowest level on record earlier in the month, according to the futures markets, with the probability of a rate hike falling to below 50%.

EUR strength continues to be the bug bear of the ECB, while Draghi has held back from attempting to talk down the EUR in recent speeches. EUR sensitivity to any talk of a tweak to deposit or interest rates is likely to be significant, which suggests that a tapering to the bond purchasing program is all we can expect from the ECB over the near-term. This morning’s Eurozone inflation figures will be watched closely ahead of Draghi speaking later today, with the EUR enjoying an end of week recovery following some upbeat talk from Chancellor Merkel and some positive consumer confidence figures.

Things could evolve on the policy front however, should the U.S administration manage to deliver on tax reforms, forcing the FED to project a more aggressive path to normalization, though the jury is still out on whether Trump can deliver and whether Yellen can muster the necessary support from within the FOMC.

• The USD strengthened this week as prospects of a rate hike increased and President Trump hinted at slashing taxes, overall what do you expect to see from the USD going forward?

The Dollar has certainly had a good week, but whether the recovery is sustainable remains to be seen. We will expect some doubts over the administration’s ability to deliver on tax reforms to weigh on the Dollar over the near-term, with FOCM members divided on the outlook for rates, Yellen’s hawkish commentary from earlier in the week needing to be discounted to a certain degree.

Inflationary pressures will need to build for the markets to buy into the Yellen story and forecasts for August’s Core PCE Price Index figures suggest that the doves will continue to rule the roost for now. On that basis, we would expect the Dollar to struggle to maintain momentum over the near-term until there is greater clarity on tax reforms and anticipated progress.

• Overall, who have been the biggest winners this week?

It was a solid week for the Dollar, which lead the way this week, supported by Yellen’s hawkish commentary, the U.S Administration’s details on tax reforms and of course, the negative sentiment towards the result of the German Election last weekend, though the Dollar is still down more than 8% year-to-date.

Interestingly it’s not just the ECB that’s going to be hoping for a sustained rally in the Dollar, with the RBA and RBNZ also looking for a softening in their respective currencies in support of favorable trade terms coupled with a pickup in inflationary pressures.

A shift in sentiment amongst FOMC members on policy will pave the way for central bankers to return to a more hawkish footing, with RBA Governor having talked up the Australian economy and a likely shift in monetary policy, ahead of next week’s RBA meeting and statement release.