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After a brief rally at the start of April, the US Dollar Index (DXY) finds itself swinging back lower within its consolidation, a range that has carved itself out over the past four-plus months. A lack of significant drivers on the US Dollar side of things, or rather, disappointment among US fundamental drivers, remains the greenback’s albatross: the Fed is unlikely to accelerate its rate hike timeline unless fiscal stimulus takes shape, which seems less and less likely for anytime before Q4’17 (if at all this year).
The swing lower by DXY yesterday thus had little to do with the US Dollar and everything to do with one of its constituents, the British Pound. To be clear: the call for snap elections in the UK is a politically savvy move by Prime Minister Theresa May, who has the opportunity to not only crush the opposition Labour party (which is historically unpopular thanks to its hapless leader, Jeremy Corbyn), but also to cut into the SNP’s stanglehold in Scotland.
In turn, by building a significant majority in UK parliament, PM May will be giving herself more breathing room when it comes to the Brexit negotiations. As it stands, PM May’s cushion of support isn’t enough to allow her to deviate away from the Brexit hardliners; however, by amassing a large majority, she can take a softer approach during the negotiations with the EU without risking a revolt within her party that would threaten her power. In turn, this means that the UK probably cedes ground on a number of its more outrageous demands, and finds an easier time reaching an amicable split with the EU.
For traders this week, the announcement of snap elections in the UK is a one-off event; markets seem likely to trudge forward in the days ahead barring more unforeseen developments springing up on the newswire. As covered in the FX Week Ahead piece, there aren’t that many ‘high’ rated events on the DailyFX Economic Calendar that could stoke event driven volatility.
