By Enrique Diaz-Alvarez, Chief Financial Risk Officer of EBURY

Markets are increasingly concerned about the prospects of endless fiscal deficits and growing public debt, especially in the US. The House of Representatives recently approved a budget bill signaling another deficit outburst, resulting in investors reacting by selling US government bonds and dollars. The dollar, which was usually reinforced when US interest rates rose, has now been in concession since the so -called “Liberation Day” began. The long -term bonds were sold internationally, with yields in the US moving more intensely. The dollar has fallen against all the basic coins worldwide, although it remains far from the lows of the “liberation day”. The currency that stood out at the beginning of the week was the Japanese yen, which seems to benefit more than the global adjustment to interest rates.

This week there are many major financial announcements from the US: orders of lasting goods, personal income, expenses and PCE inflation, as well as weekly data on new unemployment benefits, which are now gaining new importance. The markets will carefully monitor them in order to evaluate any impact from Trump’s duties. Equally important are the headlines resulting from Trump’s posts on social media, though – as has been the case with the announcement and postponement of the 50% duty on the European Union – markets seem to have developed immunity to them. We estimate that the weekly US government bond auctions will pay more attention, after the weak sale of 20 -year -old titles that have been a catalyst for the sale in long -term bonds. This week, large editions of short -term securities may be a focus of markets.

Sterling

The strong shock of inflation last week fully confirms the recent aggressive attitude of the Bank of England, and the pound is expected to remain the second currency with the highest interest rate among the main coins after the dollar for the near future. Combined with the relative durability of the British economy on Trump duties, the positive prospects for closer links with the European Union and the strong domestic demand, we are comfortable in justifying the continuing upward trend of the pound. This week there are no significant macroeconomic elements or speeches of officials – which is a shame, as we would love to see how the Monetary Policy (MPC) reacts to the hard blow of the inflation of last week.

Euro

The EU is the latest target of Trump duty threats, but markets have now become accustomed to intense phraseology and the absence of substantial continuity by the US president. The euro has ignored both the threat and the withdrawal and seems to follow a more stable and slower upward course.
The budgetary image in the euro area is by no means as worrying as in the US, with deficits remaining on average less than half compared to those on the other side of the Atlantic, despite Germany’s new budget plan. This logic can support the euro, as investors turn their attention to fiscal viability. On the other hand, the positive news news is likely to pave the way for at least two more interest rates by the ECB.

US dollar

The sale of bond markets due to concerns about the budget is pushing the dollar down, to yet another reversal of correlations that have been in place for decades. On the other hand, the financial data remains positive, without showing substantial impacts from the duties, and even the business indicators are normalized. Paradoxically, the sharp increase in duty revenue is the only positive budgetary news. This, coupled with the high yields of US bonds and unilateral market positioning – where positions show that speculators have a significant small position on the dollar – may provide some temporary currency support. However, the long -term trend is probably downward.