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According to the ISM's recent reports, services sector looks solid indeed; however, it is still not at the great level. As concerns the ISM manufacturing index, we have seen a little bounce recently, but at the moment we do not see much further improvement for a couple of reasons. Firstly, CAPEX investment is very weak, and secondly, there is a large inventory overhang in the manufacturing space. In the meantime, exports have been generally weak because of the strong Dollar. Therefore, if the ISM manufacturing index stays above 50, that would certainly be positive for the Fed, and we could definitely see a rate hike by the end of the year, though our forecast is still for an increase in December. Nevertheless, overall, the manufacturing sector looks pretty mute at the moment.
In your point of view, what will be the main economic effects of the ‘Brexit' on the US economy?
The US economy will be definitely impacted by the UK's decision to leave the EU; however, not directly. First of all, outside of financial contagion, uncertainty over the housing sector plays itself out, which will probably keep Central banks cautious. Secondly, the ‘Brexit' may weigh on business sentiment, as many firms based in the US have operations in the UK. Overall, I think that the biggest harm may come through business sentiment rather than anything else and that could add costs for the US businesses to execute large European and UK operations.
What factors will influence the performance of the US Dollar through the rest of the year?
The major headwind for the Greenback will be Central banks' decisions: how much the ECB, the BoJ and the BoE are going to do versus how far the Fed can go this year. What makes it more difficult for the Federal Reserve, is when other Central banks are adding more stimulus, as the Fed is trying to back away, driving the Dollar higher.
Overall, our view on the Greenback is far less optimistic compared with our competitors. We see it performing below the trend in the next couple of quarters, while general activity is pretty much muted ahead of the presidential election.