Dollar Is On The Defensive Despite Firmer Rates

The US dollar is softer against nearly all the major currencies. Participants appear to be growing increasingly frustrated with emerging priorities of the new US Administration. They want to hear more details and discussion of the tax reform, deregulation, and infrastructure plans. However, the priority today is on authorizing the construction of a wall between the US and Mexico and possible action on immigration from “terror-prone” countries, according to press reports.  

Sterling is the strongest of the major currencies. Having reached almost $1.26 today, it is at its best level since December 14, when the Fed hiked rates for the second time in the cycle. After an initial wobble, sterling recovered smartly after the Supreme Court’s decision yesterday requiring a both chambers to vote on a bill to trigger Article 50. The general sentiment appears to be that while different amendments will be submitted, the small Tory majority may be sufficient to frustrate the most dramatic proposals, such as having a second referendum on the entire deal.  

We anticipated that the court ruling would prove anti-climactic and that sterling was poised for additional near-term gains. Yesterday’s knee-jerk reaction saw sterling fall to test the trendline drawn off the early September and December highs, and the neckline of a possible head and shoulder bottom pattern (~$1.2425 and $1.2415 respectively) and recover to close on its highs. And today, follow through buying has lifted it further. The intraday technical readings are stretched.A support band between $1.2500 and $1.2550 may be sufficient to deter sharper losses.  

On the other hand, the Australian dollar is the weakest of the majors, being the only one lower against the dollar. It is off about 0.6% after a disappointing CPI report. To frame the issue, recall that the Australian dollar fell in each of the last three months of 2016, and four of the last five months. However, this month has been a different story. It is the strongest of the majors, gaining around 5% coming into today’s session.