US Dollar strengthens ahead of Trump inauguration speech

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20 January 2017

thomasdodds

The US Dollar rallied against its major peers on Thursday with the market looking ahead to Donald Trump’s inauguration as the next President of the United States today.

T
rump will be speaking following his inauguration which begins at 17:00 UK time this afternoon, with investors looking for any mention of fiscal policy as part of his speech. During his election campaign, Trump claimed he would ramp up spending and cut taxes in the US once in office, with his election victory sending the Dollar sharply higher as a result. Trump’s economic policies are likely to be pro-growth and Dollar friendly, despite his comments earlier this week, where he voiced his concern that the Dollar was too strong.

Meanwhile, on Thursday, the European Central Bank provided no surprises whatsoever during its monetary policy announcement. The very low key meeting provided little significant reaction in the Euro, which ended modestly lower across the board following a slightly dovish statement from ECB President Mario Draghi.

The central bank kept its policy unchanged, although Mario Draghi appeared unimpressed by the recent improvement in inflation in the Eurozone. Draghi reiterated more stimulus was possible and that the recent increase in inflation, which spiked to a three year high 1.1% in December, was “unconvincing”.

Attention today will be firmly on Trump’s appearance. We think there remains downside risk to the greenback this afternoon, should Trump fail to emphasis his policies which have driven previous appreciation in the currency. Retail sales in the UK will also be worth looking out for.

Major currencies in detail

GBP

Sterling rose 0.3% against the US Dollar yesterday, steadying above the 1.23 level after a volatile few days following Theresa May’s heavily scrutinised Brexit speech. The Pound also took advantage of a fairly cautious sounding European Central Bank to end the session 0.4% higher against the Euro.

Theresa May spoke again at the World Economic Forum meeting in Davos, reiterating that the UK wanted to seek “ambitious” free trade deal with other European countries. While the Pound was little moved on her comments, political developments remain the main driver for Sterling at present. We expect the UK currency to remain very sensitive to Brexit news as the triggering of Article 50 approaches, likely to take place before the end of March.

Retail sales are expected to have accelerated in December when released this morning. However, with focus on political developments in the UK, reaction in Sterling could be limited to the news.

EUR

The Euro slipped 0.2% versus the US Dollar yesterday after Draghi’s slightly dovish message.

The tone of Draghi’s comments yesterday reinforces our view that the ECB remains overwhelmingly in easing mode. Policymakers in the Eurozone have pledged to look through the latest increase in inflation, which was attributed mostly to rising oil prices. As such, we’re unlikely to see higher interest rates in the Eurozone until deep into 2018 at the very earliest.

While Draghi acknowledged recent economic data had been surprisingly strong, he argued that the growth outlook was fraught with risk, requiring the bank’s large scale stimulus measures to remain in place.

German producer prices this morning are unlikely to rock the boat with the Euro likely to be driven predominately by events elsewhere, namely Trump’s first speech as President.

USD

The US Dollar rose 0.35% against its major peers on Thursday, buoyed by the relatively dovish stance from Mario Draghi at the ECB’s press conference.

Economic data out of the US was fairly encouraging again on Thursday. Housing surged in December, spiking 11% in the last month of 2016 to 1.23 million, capping the best year since 2007. Initial jobless claims also fell sharply, declining to 234,000, while the Philly Fed manufacturing survey rose more than expected to 23.6 from 21.5.

With no economic data in the US today, investors will be fully focused on Donald Trump’s inauguration at 17:00 UK time.