Dollar Flexes Muscles Ahead of EU Elections

Market Drivers May 21, 2019
AUD falls through 6900 on dovish Lowe
Dollar bid across the board
Nikkei -0.14%
Dax 0.62%
Oil $63/bbl
Gold $1275/oz.

Europe and Asia:
No Data

North America:
USD Existing Home Sales 10:00

The dollar was well bid across the board as political and economic factors dogged the other G-10 currencies today in light but firmly directional trading in Asian and early European dealing.

The Aussie, which saw a strong boost yesterday from the win of the center-right Liberals over the weekend, gave back a big portion of its gains after Governor Lowe conceded that the central bank will likely cut rates in June. Although markets have largely priced an RBA rate cut, up to now Mr. Lowe has been non-committal about a rate cut, leaving room for doubt that RBA would move this month.

In last night's speech, however, Governor Lowe stated that he would consider a rate cut in June, adding that such a move would help support employment growth and spur inflation. The remarks pretty much telegraphed a rate cut next month. The key question going forward, however, is whether the RBA has now shifted its posture to an accommodative stance or whether the central bank will follow in the footsteps of RBNZ and essentially communicate that the rate cut was "preventative" in measure and therefore likely to be "one and done" for this year.

We think that while the RBA would not rule out further cuts in 2019, it will nevertheless communicate a wait and see attitude which should stabilize Aussie for now ahead of the .6800 figure.

In Europe meanwhile both euro and cable slipped lower ahead of the EU elections with markets fearing big wins by populist parties whose very purpose is to disband the very parliament they are competing for. Investors are understandably nervous that an already economically weakened Europe could face political turmoil that could add to the downward pressure on the currency. For now EURUSD remains supported at the 1.1150 level but looks vulnerable to further selling pressure and perhaps a test of 1.1100 if North American corps extend the overnight flows.

The eco calendar today is very quiet, by the Existing Home Sales data could provide a boost to USDJPY if the number beats the forecast. Home sales have been a sore spot for the US economy and had only recently started to show some signs of demand. If today's number print above the 5.35M run rate projected USDJPY could push towards 110.50 as the dollar rally extends as the day proceeds.