Dollar reasserts its dominance

The thinner volumes over the bank holiday weekend have once again seen sell-offs in both EUR/USD and GBP/USD.

GBP/USD
Source: Bloomberg

European central bank to push ahead with QE
This morning will see the EU’s economic forecasts released, which will give the markets an idea of how much optimism surrounds the varying member states. Further clarity of exactly where the health of the region is will be given tomorrow morning when a plethora of countries post their latest services purchasing managers index figures.

The noise created from these economic updates can lead the market into distraction from time to time, as the recent rally in EUR/USD highlights. The pressure that will undoubtedly return as the European central bank (ECB) continues to press ahead with the European version of quantitative easing (QE) will ultimately tell on the euro and renewed effort to break to lower lows will materialise. The bottom line is €60 billion of QE on a monthly basis weakens the euro and, as the Federal Reserve required three attempts at QE before they felt it was successful enough, there is every likelihood that the current end date in September will not be met by the ECB.

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General election ensures volatility
Only two days to go before the UK general election and the strength of the FTSE and sterling have barely been dented. Considering we are looking at over 90% chance of no majority and a very unappealing list of possible coalitions or majority parties, the markets have remained remarkably blasé about the whole thing.

The last four trading days have seen GBP/USD smash its head on the $1.55 level and subsequently fall away. The run up to that region had been substantial and, having seen 900 pips being added, it was maybe no real surprise that a selloff was overdue – especially as GBP/USD had moved into overbought territory.

The markets will now be paying attention to the UK election especially as the two major parties have differing views on the country’s status in the EU. Should the Conservatives come to power, they have promised to hold a referendum on whether the UK remains part of the EU – whereas the Labour party have made no such claims. The outcome is far from clear so volatility looks assured.

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