USD weakens as ECB leaves rates on hold
In a very eventful 2 weeks, attitude towards the USD has changed, with USD losing ground after the Fed relaxed its stance on rates. However, escalation between Israel and Hezbollah, increased certainty of a Trump victory and Sino-US trade tensions have forced the market to buy USD as a safe-haven trade.
GBP: GBP continues to trade with a strong bias and holds onto gains GBP/USD to multi-week highs at 1.290 and GBP/EUR holding above 1.1850. June saw a dovish ‘hold’, where interest rates remained unchanged but the messaging was that rate cuts were on the way. Despite this, Labour’s overwhelming victory has added some certainty to the future of the UK and buoyed the market, taking GBP/USD to yearly highs above 1.3000 this week.
UK data remains mixed .. this morning’s Retail Sales were very weak (contracting at 1.2% vs expectations of -0.4%). The detail in the data is even more concerning, with every retailer showing a decline in receipts except those selling fuel. Yesterday’s employment data yesterday was mixed, but the general mood was that an August rate CUT remains a possibility (increasing to nearly 40%).
With persistent weak data like this - GBP will not hold onto those recent gains.
USA: Comments from US Fed Chair Powell weakened the USD on Wednesday, and we have seen a lot of Fed members towing the line – summary below:
Williams: “Interest rate cut could be warranted in the coming months”
Goolsbee: “Inflation fight is not done but I feel a lot better”
Waller: “The Fed is ‘getting closer’ to an interest rate cut”
Barkin: “Easing in inflation had begun to broaden and would like to see it continue”
So, the Fed looks likely to cut rates before the November US Presidential election, but we are already seeing headlines that Trump is pressuring the Fed NOT to do so. As Trump looks more likely to win the Presidential race, the market is sure that this will bring inflationary pressures on the US economy, so a cautious approach is being taken by the market, adding a certain nervousness to any move.
EURO: The EURO remains lacklustre - GBP/EUR at 1.1900, but due to recent USD weakness we have EUR/USD holding up at 1.0850 levels.
The ECB kept interest rates unchanged this week, at 3.75% - Rabobank remarks:
“A September rate cut remains very likely, even though ECB President Lagarde stated that the outcome of that meeting is ‘wide open’. We see upside risks to our deposit rate forecast, but particularly later in the easing cycle.”
ECB members have subsequently commented that these markets expectations are broadly correct – the ECB is doing a decent job of giving forward guidance without surprising markets.