It’s a Mill Pond of a Day leaving the Dollar on the Front Foot
It’s another quiet start to the week, with material macroeconomic data this morning being limited to German’s May trade figures, which will leave the markets with little else to consider other than Friday’s data out of the U.S and what’s scheduled for release for the week ahead, though it’s not just going to be down to the stats, with a wave of central bankers speaking through the week.
Following the weaker than forecasted wage growth figures in June, sentiment towards a final move by the FED remains mixed, despite the Friday’s release of the FED’s semi-annual monetary policy report and June economic projections.
The rules of the game have changed and the FED has brushed aside inflation and focused more on a tightening labour market, the latest increase in the unemployment rate attributed to more Americans returning to the labour market than a deterioration in labour market conditions. The latest figures suggest that wage growth could struggle to gain traction until such time that the tap runs dry for workers who had not been looking for work due to labour market conditions following the global financial crisis.
With the FED maintaining its stance on monetary policy, the markets will get further guidance through the week on the extent to which FOMC members are divided, with voting members Brainard, Kaplan and Kashkari speaking, with the FED Chair’s testimony on Wednesday also of interest to the markets.
We can assume that Kashkari will maintain his unwillingness to take a more hawkish outlook, leaving Brainard and Kaplan to provide their views on beginning to selldown the FED’s balance sheet and a final rate hike by the end of the year.
Stats out of the U.S are on the lighter side through the week, the markets having to wait until Friday for some real meat, which will certainly have the markets looking towards the U.S administration and elsewhere for direction, Trump continuing to do very little to contribute to economic growth and prosperity, in spite of the inspiring promises made that had led to the surprise victory back in November.
While focus will be on Yellen and FOMC commentary through the week, the EUR softened off this morning’s trade data out of Germany, though the easing was attributed more to a revision to April’s surplus than the in-line with forecast May numbers, with both exports and imports rising well beyond forecasts for the month of May.
The markets having largely priced in a shift in the ECB’s view on monetary policy, the real question being how aggressively the ECB will be looking to taper the asset purchasing program and when Draghi and team will begin considering a move on rates. Today’s trade data may not be enough to cause the ECB to look to do more, with inflation lagging, but the positive data will certainly reinforce the new found ECB confidence in the Eurozone economy.
With no material stats out of the UK, the markets will be looking ahead to the roll out of the European Communities Act Repeal Bill, which will likely stir up the opposition parties and some of the Conservative Party backbenchers, the UK government needing to remove European Court powers over the UK upon leaving the EU.
Reintroducing UK Law is obviously a must have from a Brexit perspective, but with Theresa May having lost material support, the minority government and the pound will continue to feel the heat as Brexit bills roll out.
For the pound, last week’s stats were quite woeful and the unexpected widening in the trade deficit and slide in manufacturing production was further evidence that demand for UK goods have deteriorated and the economy is looking set for choppier waters going into the 3rd quarter.
Whether the BoE Governor maintain his more hawkish outlook on monetary policy remains to be seen, with employment figures out on Wednesday likely to be of particular influence, the BoE having maintained its previously neutral monetary policy position based on a weaker employment projections for the year.
Tepid wage growth is not faced by the BoE alone, with the BoJ, the ECB and the FED seeing similar trends in spite of a tightening market, but from the BoE’s perspective, claimant counts will at least need to hold steady with no material uptick in unemployment numbers. A BoE move to reverse last August’s rate hike will increase borrowing costs and, while the BoE will be looking to curb inflation in support of domestic consumption, rising rates will raise questions over whether the negative effects on household disposable incomes will offset the positives from an easing in inflationary pressures. For now, we see the BoE to remain torn, though the markets could be clearer on what lies ahead with BoE MPC members Haldane and Broadbent scheduled to speak tomorrow morning, of interest being Haldane’s view on last week’s disappointing figures and whether he maintains his support for a likely move in the next meeting.
At the time of the report, the pound has managed to hold on, with a gain of just 0.05% to $1.28961, with the upside in the EUR easing following this morning’s trade figures, the EUR down 0.02% at $1.13990.
It’s a mill pond of a day, with the markets seemingly taking a pause following last week’s moves, with any directions likely to favour the Dollar through ahead of key stats and central bank commentary, with the Dollar Spot Index up 0.02% at 96.051 at the time of the report.