01 July 2019: Fed cut in doubt following trade truce

Fed cut in doubt following trade truce

July 1st: Highlights

  • G20 outcome “best that could have been expected
  • Brexit still dominates Sterling’s path
  • Sentiment data unlikely to help euro

Trump agrees to postpone new tariffs as talks to continue

A few caveats were placed upon analyst’s expectations of a series of rate cuts by the Federal Reserve following its most recent meeting. A dovish statement placed pressure on the dollar and the interest rate futures market placed a 100% certainty upon a 25bp cut at this month’s meeting.

One of those caveats was a positive outcome from the G20 meeting which took place over the weekend. There were several possible outcomes from talks between Presidents Trump and Xi but, in reality, a truce was probably the best that could have been expected.

In truth, talks could go on between Washington and Beijing until doomsday without finding an agreement since both sides have fundamental positions which are not open to negotiation or compromise. As such, the only possible breakthrough would be due to a change in personnel, which depends upon next year’s U.S. Presidential election since Xi is unlikely to be leaving his job any time soon.

There had been significant speculation about the path the dollar would take following a positive outcome from G20. So far, the reaction has been muted with the dollar opening in Asian trade this morning just a little stronger.

Following a close at the 96.20 level which has been the pivotal point for traders over the past few sessions, the dollar has risen marginally, reaching a high of 96.37 so far this morning.

The path for short term interest rates in the U.S. is now a little less certain although traders will still expect this month’s cut to go ahead. Traders will now pay particular attention to remarks made by Fed. Chairman Jerome Powell and his colleagues from the FOMC in the run-up to the meeting on 30/31 July.

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Promises made in the heat of the battle

Conservative Party leadership candidate Jeremy Hunt may be entitled to feel a little disappointed this morning. On TV yesterday, he made a comment agreeing with a policy expressed by his opponent Boris Johnson and was immediately set upon by commentators.

Hunt agreed that as Prime Minister he would take the UK out of the EU on October 31st were there to be no prospect of a deal being reached. His mistake was to be too honest and open by saying that there would be casualty’s in the shape of jobs, but he would have to accept collateral damage with a “heavy heart.”

Everyone is aware of the ramifications of no deal on the economy and therefore on employment but for Hunt to so graphically illustrate the danger did his campaign no good at all.

Bookmakers rarely get things wrong since their livelihood depends on them being right most of the time. It is interesting to note that while Johnson is now 1/10 to be elected Conservative Party Leader, the odds on leaving the EU this year are longer than the odds to be leaving next year!

While Sterling remains driven by Brexit and all it entails, it will be the greenback’s reaction to the trade truce which provides direction over the next 48/72 hours as traders digest the outcome of G20.

Theresa May made one of her final appearances as (acting) Prime Minister at G20 giving Russian President Vladimir Putin a slap on the wrist for allegedly using nerve agent Novichok to attack a former Russian spy in the UK. It appeared that Putin treated Mrs May with a similar attitude to what has been seen in Parliament over the past year.

Sterling closed on Friday at 1.2695 having reached a high of 1.2735. It has opened a little lower in Asia this morning, making a low of 1.2687.

Data driven euro in uncertain territory

The euro has a history of reacting to a wider range of data releases than is the case in other G7 economies. Forward-looking sentiment indices have a habit of becoming “self-fulfilling prophecies.” Also, despite the ECB’s assurances that it only looks at data for the whole region, it is clearly German data that is the bellwether for the Eurozone.

This week sees the release of the Markit Manufacturing Index for the Eurozone which is expected to confirm the recent trend towards a bottoming out of data. Although manufacturing output is expected to continue to contract, it is expected to be unchanged from last month at 47.8. A level of 50 is the median between expansion and contraction.

German output expectations are also released today and a slight improvement form 45.6 from last months 45.4 is expected. This is clearly coming from an exceptionally low base and any further contraction from here would almost certainly signal a recession for both Germany and the wider Eurozone.

Later in the week, Eurozone retail sales will be released. Again, a slight improvement is expected. However, German factory orders are expected to remain in the doldrums as uncertainty over supply chain continues even as sentiment improves.

The single currency is also likely to remain driven by the G20 outcome this week together with reaction to the U.S. employment report which will be released on Friday.

Last week, the euro closed at 1.1371, unchanged from the previous week having traded in a 1.1414/1.1344 range. So far today, it has traded marginally lower following G20.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”