Positive News Flow Past 24-hours Boosts Risk, Holds Back US Dollar
- BOE Governor Carney instilled confidence in the GBP yesterday.
- Strong US housing data and the Greek aid news boost risk mood.
- Higher volatility in FX markets should have implications for your trading strategies.
Good news from across developed economies is proving to be a shot in the arm for higher yielding currencies and risk-correlated assets the past 24-hours. In turn, even as USD/JPY has stayed elevated, the reach for yield has pushed the US Dollar to the sidelines, part
The positive news cycle kicked off yesterday morning when Bank of England Governor Mark Carney made clear the extent of damage a Brexit would do to the UK economy. With voters looking less likely to opt out of the EU on June 23, the risk of another full blown existential crisis for the Euro-Zone seems less likely.
Then, yesterday's April US New Home Sales report was the best in eight years, which in turn sent US equities higher: the strengthening housing market should bode well for consumption trends (we'll look for evidence in upcoming Durable Goods Orders reports).
Capping off the good news the past 24-hours was the preliminary agreement in the Greece-IMF bailout tranche deal, which staves off another chapter in the crisis - until at least after the German federal elections. Surely, this is another 'kick the can down the road' type of deal with no real specifics, but markets feel it's better than the alternative: no deal at all.
It's been a pretty good 24-hours for risk-appetite, no doubt. But there's still a good deal of wood to chop today before the forrest is cleared: three Fed speakers are due up. The combination of improving market sentiment alongside rising Q2'16 US growth expectations leaves open the door for an accelerated rate of hawkish commentary from Fed officials over the coming weeks.
I can't help but feel - Is this déjà vu? US economic data improves > US equities rally > Fed talks up possibility of rate hike > US Dollar rallies > US economic data disappoints > US equities fall > Fed talks down possibility of rate hike > US Dollar falls > US economic data improves... wash, rinse, repeat.
If you haven't yet, read the Q2'16 Euro Forecast, "EUR/USD Stuck in No-Man’s Land Headed into Q2’16; Don’t Discount ’Brexit’," as well as the rest of all of DailyFX's Q2'16 quarterly forecasts.
--- Written by Christopher Vecchio, Currency Strategist
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