USD Monthly Review May 2018

Despite his detractors’ opinions, there is no doubt that President Trump enjoyed major success in April. The pressure brought to bear on North Korea has seen Kim Jong-un suspend nuclear testing and the “surgical strike” on Syria’s alleged Chemical Weapons facilities have brought about a change in global risk appetite and provided a boost to the dollar.

The yield on ten-year U.S. Government debt has risen to the psychologically significant 3% level for the first time in four years. The market’s concern over America’s trade and burgeoning budget deficit has led to higher rates.

Jerome Powell, the new Chairman of the Federal Reserve, is the perfect man to take over in the current economic environment. His background determines that he can act in a reactive way to the economy without the need for further pre-emptive action as favoured by his predecessor. With CPI well below the level expected at this stage of the economic cycle, the FOMC can afford benign neglect.

The dollar index has rallied above its short-term resistance at 90.50 and looks set to move higher, although the Euro, which is the primary constituent of the index has strong support at 1.2160 which may halt the advance.

As is generally the case, the employment report will set the tone for the economic performance of the dollar during the month. While the headline remains inconsistent, the rise in wage growth will have a significant effect on the prospect for future rate hikes.

Following Secretary of State nominee Mike Pompeo’s visit to Pyongyang, the date and venue for the Summit between President Trump and Kim Jong-un is likely to be announced. This will have a major effect on global risk appetite and a significant bearing on the Korean Peninsula.

As well as the U.S./N. Korea summit, it is proposed that Treasury secretary Steve Mnuchin visits Beijing to discuss the trade agreement between the U.S. and China. This will be a significant step in relations between the two countries and will be a further boost to global risk appetite.

The dollar is benefitting from several positives, and that is set to remain giving the greenback momentum to post new 2018 highs in May. A weakening JPY, EUR and GBP should see the dollar index climb to test 92.20.