U.S. GDP lower but within range
Morning mid-market rates – The majors
July 29th: Highlights
- FOMC & NFP highlight defining week for the dollar
- Sterling lower as Cabinet plans for no-deal
- Rate cuts in September to pressure euro
FOMC to cut by 25bp and study economic reaction
The GDP data for the second quarter which was released on Friday showed that the economy grew at 2.1% between April and June. This was a little better than expectations. Since this was simply a preliminary number with several components still to be completed, the market expectation will be for any revision to be higher.
The 2.1% GDP data finally put an end to any hope of a 50bp cut this week and placed in serious jeopardy any expectation for a further cut this year. Should the FOMC appear a little more dovish than expected on Wednesday it will be clear that they have advance data on either the way the economy is performing so far in Q3 or that the employment data will be lower than expected.
As has been the case for some time now, analysts’ expectations for the NFP are closely aligned with the six-month moving average which currently stands at around +170k. Hourly earnings are expected to have risen to 3.2% from 3.1% this month.
The dollar index closed the week at 97.99 having made a high of 98.09. It was the first time since the end of May it had breached 98.00.
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Sterling under pressure as Government plans for fresh negotiations
Johnson’s point is that Michel Barnier and Jean Claude Juncker knew that the Agreement was subject to ratification by MPs so the fact that it cannot be passed means there has to be further discussion.
The no-deal posturing that is taking place is no doubt unsettling for Brussels, but the point is close to being reached where, whether it is a bluff or not, Brussels would be foolhardy to call it, since the UK Government will not be able to back down now.
Sterling had its lowest weekly close since April last year on Friday closing at 1.2382 against the dollar. Versus the euro, it reached a low on the week of 1.1104, closing at 1.1128. The euro remains under pressure, but Sterling is clearly in the market’s headlights.
The weekend press had several stories about Michael Gove, the Cabinet Minister responsible for No-Deal Planning commenting that he sees no-deal as an assumed outcome for the Government. He went on to comment that “proper” planning is now taking place.
Dovish ECB concerned over savers and inflation
Clearly, there is concern about and conversations over savings rates. This is in order to head off an issue that has been “bubbling under the surface” for some time. That is that savers are not receiving any interest on their savings and so are less inclined to save. The irony is that spending is fairly uninspiring too, so it is likely that incomes, which have been promised by Draghi to rise, remain in the doldrums.
Inflation is still falling. There was some talk that the target rate would be cut but it is hard to see that being anything more than a cosmetic exercise.
There is little positivity to offer from the Eurozone currently and with Brexit still a worry, Italy threatening to erupt again at any time, and economic activity again contracting in July the future looks anything but rosy.
There are investors calling for parity for the euro versus the dollar and if the Fed remains hawkish following its meeting this month and given the disparity in growth rates that is no fantasy.
On Friday the euro closed the week at 1.1128, having reached a low of 1.1101. It is reported that there is heavy option protection and some large corporate orders at and just below 1.1100 so it is unlikely that that level will be breached before Wednesday, and it is certain that most of the action will be in the second half of the week.
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.”