Optimistic Powell Drives Dollar Higher
Morning mid-market rates – The majors
July 18th: Highlights
- Steady pace of rate hikes to continue
- UK Government survives rough ride over Brexit Trade Proposals
- UK rate hike unlikely after Carney, wage data
Fed to continue hiking rates through 2019
He played down fears of an extended global effect from a trade war with China, a concern voiced by the IMF the previous day, and said that the Fed would continue its hiking bias well into 2019.
He said that it is vital that the Fed gets monetary policy right to ensure that employment growth remains strong although he sees some “tightness” in the labour market as the unemployment rate falls below 4%. Powell acknowledged a delicate balance between raising rates sufficiently to keep pace with the growing economy but not so much as to be a factor in any slowdown.
Traders liked what they heard from the Fed Chairman and the dollar index rose accordingly. Versus a snoozing euro, the dollar rose to 1.1649, closing at 1.1661. As I have said before, the ECB is content with a weaker single currency given its beneficial effect on the economy and exports, so it is set to trend lower. The dollar index rose to 95.06 and has continued to rally overnight as Asian stock markets take on a risk-on profile which also benefits the greenback.
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UK Government survives another Parliamentary vote
The Chequers Proposals have been “cut and pasted” several times but now appear ready to be put before the EU which is likely to reject several of them, in particular, the idea that the UK should collect customs levies on goods passing through the UK on their way to the EU and that that Brussels should reciprocate on behalf of the UK.
While it may work on paper, in the real world such a convoluted proposal would bring chaos to ports and likely, place the UK in a weaker position than it was pre-Brexit.
Mrs May is now desperate for Parliament to reach its summer recess, whereupon she will have time to reflect on the next steps in both her Premiership and the entire Brexit process.
Her fate is now inextricably tied to the Chequers proposals together with the amendments forced upon the Government by the “leave” half of her Party. She faces an impossible task if Brussels, as it is quite possible it will, rejects large parts of the proposals, since this is the limit of what she is prepared to offer.
Pound falls on Powell and Carney comments
The pound fell even more precipitously versus the euro, reaching a low of 1.1221 before closing at 1.1248. It has recovered a little overnight on profit taking by short term traders reaching a high (0600BST) of 1.1257.
Mark Carney, the Governor of the Bank of England added to the pressure on Sterling by commenting that if Brexit talks with Brussels turn out to point to a no-deal or hard Brexit, the Bank would have to revise its entire monetary policy outlook to provide support to the economy and the pound. He warned that the UK will face grave economic consequences from a hard Brexit. This could lead to an emergency interest rate cut.
His words took any prospect of a rate hike next month off the table. In evidence to the House of Commons Treasury Select Committee, Carney was cautious about how the Bank would react going forward clearly concerned about the effect of his words on the currency but was sufficiently forthright to confirm his worries for the long-term prospects for a no-deal Britain.
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.”