Market Analysis: Gauging the USD, Brexit in Brief


May, 2019

AK Equity Group

Gauging the Dollar: Factors to Watch

A key driver for the US Dollar in the week ahead is the Personal Consumption Expenditure Index (PCE).  The PCE is one of the main gauges that the Federal Reserve uses to measure inflation, because consumers contribute the largest share in America’s economic growth.

The PCE works as a useful gauge, because if it rises, that means consumers are spending more, which would indicate that inflation may be on the rise. Typically, the Fed will then respond with a rise in interest rates, which can then bring a rise in the currency due to increases in net foreign capital inflows.

The PCE in April is forecast to rise by 1.6% compared to a year ago and 0.2% compared to a month ago, when data is released at 13.30 on Friday, May 31. This compares with 1.6% and 0.1% respectively for March. If the end of May PCE results are aligned with expectations, it will likely have little impact on the Dollar. If results come in higher, it could trigger a rally; if results come in lower, it may signal a decline.

Another key factor affecting the Dollar will be the second estimate of Q1 GDP growth figures, which is currently predicted to show a slight slowdown to 3.1%. If the GDP rises unexpectedly, this could cause the Dollar to resume its general trend upwards.

Brexit in Brief

In the Conservative leadership race, candidates are competing to demonstrate their willingness to remove the UK without a deal. Markets are reacting as leadership rivals posture about making October 31 the final deadline. But making a “no-deal” exit a reality isn’t that simple. Here are some of the mitigating factors to keep in mind:

  1. The Tories Who Are Choosing Next PM Want No-Deal

The process for choosing the next prime minister involves the Conservatives narrowing down candidates to a final two. Two-thirds of those members want a no-deal Brexit, according to a poll by YouGov.

  1. Parliament Opposes A No-Deal Exit

While the majority of members of Parliament are opposed to a no-deal exit, there’s not a clear mechanism at their disposal to actually prevent it happening. It’s possible that a Tory leader could manage to push a no-deal exit through; the majority members of Parliament would have to find a way to prevent it.

  1. No-deal Could Trigger Election

One route for Parliament to prevent no-deal would be to use a vote of no-confidence in the government. Since the Conservatives lack a majority, it would only take a very small number of Tory MPs to side against the government in order to win the vote. If the next prime minister is a polarizing hardliner, it likely wouldn’t be difficult to find some within the Tory party who would be willing to side against the government under the right conditions.