With US President Donald Trump embroiled in a number of Russia and FBI related scandals, the US Dollar tumbled to its lowest level since last September against the Pound last week.
Trump Troubles Rock US Dollar
The ‘Greenback’ weakened last week in reaction to fears that President Trump could be impeached. Although such a drastic move is a long way off, traders fear that Trump’s proposed tax reform and infrastructure spending policies may struggle to see the light of day if the President remains mired in controversy. Fired FBI director James Comey is reported to have accused Trump of attempting to impede the agency’s investigation into his ties with Russia. Some political commentators noted that this could be construed as ‘obstructing the course of justice’, which could potentially lead to impeachment.
The US Dollar rallied strongly when Trump was elected on hopes that fierce tax cuts and huge spending plans would drive rapid employment, wage and economic growth. If these plans don’t come to fruition then the ‘Greenback’ could yet depreciate further.
UK Data Comes In Strongly
In the UK, inflation rose from 2.3% to strike a three-and-a-half-year high of 2.7%, beating forecasts of 2.6%. However, the figure did not boost Sterling’s appeal because traders bet that it would lead to falling real wages and therefore prove a drag on domestic growth.
The Pound responded more to data showing that unemployment tumbled to a 42-year low of 4.6% in March, thanks to a 122,000 surge in job creation. It was not all good news though because wage growth slowed to 2.1%, indicating that real wages have indeed fallen back into negative territory.
Thursday saw ‘Cable’ appreciate by around a cent to break through significant resistance and strike an eight-month high as a 2.0% expansion in retail sales defied fears that inflationary pressures could depress consumer spending, for now at least.
Dovish Fed Drags On Dollar
GBP/USD suffered from a mini flash crash on Thursday evening, tanking over 100 pips in 12 seconds. However, Sterling bounced back through psychological resistance on Friday when Federal Reserve official James Bullard warned that US data was not strong enough to support the further two rate hikes that are pencilled in for 2017.
Week Ahead
Sterling wobbled over the weekend in reaction to news that the Conservatives’ lead over Labour had been halved from 20-points to around 9-points following the release of the Tory manifesto. The new polling data suggests that June’s election may be closer than first thought, which caused a re-pricing of Sterling as traders considered the possibility that Theresa May might not gain the majority necessary to strengthen her hand in the upcoming Brexit negotiations.
Volatility is now expected in the build-up to the general election on June 8 but Sterling is liable to hold the upper hand if Trump scandals continue to dominate US headlines.
In terms of data, annualised UK GDP is tipped to hold steady at 2.1% while the US equivalent could be upgraded slightly from 0.7% to 0.9%.