Significantly Stronger U.S. Q2 GDP expected
Morning mid-market rates – The majors
July 27th: Highlights
- Trump tax cuts and infrastructure programmes kick in
- ECB continues dovish mantra
- Sterling weaker as dollar rallies
Trump’s policies speak louder than words
However, Trump’s programme of tax cuts earlier in the year, coupled with several major infrastructure projects have contributed to a significant rise in Q2 GDP the first cut of which will be released today. Analysts expect growth to have risen by 4.2% following Q1’s meagre 2%.
This confirms the advance guidance from Fed. Chair Jerome Powell that there will be two further hikes in short term rates this year and a similar number to this year in 2019 as the Fed. continues on the path to normalization of rates.
Powell will argue that an economy where growth is returning to normal needs rates on similar trajectory to ensure inflation remains under control.
One slight dampener today could be the release of Personal Consumption Expenditures, Powell’s “favourite” measure of inflation which are falling back towards 2%. The recent rise in the oil price contributed significantly in recent months but that pressure has abated somewhat.
The dollar index rose to 94.72 as growth expectations grew, closing within one pip of the high.
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Draghi comments fail to rally single currency
Draghi continued the ECB’s tough stance on Greece, remaining consistent in his denial of Greece’s request for its bonds to be included in the Asset Purchase Scheme. in any event large-scale asset purchases will start to be wound down in two months and be concluded by December.
There had been some hope that Greece would receive the not only the benefit of joining the programme even for a short time but also, gain significantly from a vote of confidence from the Central Bank. Bernard Coeure, the ECB economist, commented recently that was unlikely to happen and this was confirmed by Sr. Draghi.
The euro also fell against the pound on a (spurious) belief that the interest rate differential between the UK and eurozone could widen next week. It fell to 1.1280 before settling down to close at 1.1260.
Sterling pressured by stronger dollar
Traders appear to be in a similar situation to a few months ago when expectations were high, only for Governor Carney to dash them a few days before the meeting, causing considerable angst in the Hedge Fund community. It is difficult to judge market positioning since there is a large shadow cast by Brexit. However, a further test of the 1.3000 level is possible if traders are disappointed.
Carney commented recently that an emergency rate cut may be needed if no deal or a Hard Brexit becomes more than a possibility as it is currently. Therefore, the only reason I can see for a rate hike next week would be to provide greater leeway down the road, giving a boost to Sterling and baring the Central Bank’s inflation fighting teeth which have been missing in both word and deed for several months.
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.”