The euro is nearing parity as the market prepares for a summer Fed rate hike

Ebury, weekly currency outlook

The relentless rally of the US dollar against other major currencies continued last week. Currency markets remain focused almost exclusively on the divergence in monetary policies among the world's major monetary groups, as the Federal Reserve is the only G10 central bank expecting a near-term rate hike. We view this rise as a clear sign of positive news for the global economy.

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On one hand, it provides a strong momentum for Eurozone y Japan, while it may be well received in the american economy as a consequence of the strengthening of labor market and domestic demand.

 

That said, the dollar's appreciation, exceeding 15% on a trade-weighted basis over the past seven months, is virtually unprecedented. The consensus among analysts seems to be anticipating the first rate hike by the Federal Reserve this summer. We expect this to occur in June. However, we will be paying close attention to the Federal Reserve's statements following the Federal Open Market Committee (FOMC) meeting. Any explicit reference to a strengthening dollar will undoubtedly trigger an upward revision of price growth expectations. More generally, this may be a good time to point out that markets never move in a straight line for very long, and the dollar has been doing just that since the summer of 2014.

 

 

 

 

EUR

 

Last week's news from the Eurozone was mixed. Strong industrial production in France and Germany contrasted with Italy's disappointing and continued contraction. However, at an aggregate level, it is clear that the Eurozone economy continues to gain momentum and is close to posting results of modest acceleration in the first quarter, following two previous quarters of very moderate growth.

 

While Greece and the ECB are fading from the headlines, markets are focusing entirely on the divergence between monetary policies on either side of the Atlantic. As we noted earlier, next week's statement from the Federal Reserve is key to the euro's short-term performance, especially given the lack of economic or monetary news from the Eurozone.

 

GBP

 

Last week, the UK released its first negative economic data in months. Construction activity fell by 2,6% in January, and manufacturing output also fell short of expectations, contracting by 0,5%. We continue to expect 3% economic growth for the first quarter; however, we will need to see a shift in these results when the February data is released to support this forecast.

 

Investor attention now shifts to the budget, due to be released next week. In previous years, the budget has generally been a relatively minor event in terms of market impact, and we expect this year to be no different. We believe there is a high probability that strong economic performance, coupled with better-than-expected tax revenues, will lead to a relaxation of departmental cuts, which on a large scale will not significantly affect the macroeconomic outlook. The pound's performance in the coming weeks will continue to be driven by the anticipated schedule of interest rate hikes by the Bank of England and the Federal Reserve.

 

USD

 

In the US, the weakness of some data continues to be surprising, with the notable exception of the labor market. Last week's retail sales figures disappointed, contracting for the third consecutive month. Of course, it remains to be seen how much of this negative result is related to the harsh winter experienced across most of the United States. We await the release of the next report, which should no longer be affected by the bad weather, before drawing any medium-term conclusions about this weakness.

 

The dollar continues to completely ignore this weakness and extended its record rally last week, as analysts and markets set their sights on a rate hike this summer. Next week's statements from the Federal Open Market Committee (FOMC) take on greater importance. Both the dollar's strength and the Federal Reserve's recent interventions appear to reinforce investor expectations that the first rate increase will occur in June.