The big mover this week was the American dollar which found itself under pressure. Anticipation was high that July inflation data and minutes from the Federal Reserve (Fed) July monetary policy update would offer a positive sign for a near-term rate hike in the USA. Ultimately this didn’t materialise and markets trimmed USD long positions in response. First up was the American CPI result, the headline number read as expected, but undistinguished, at 0.0%. While recent labour sector data has been encouraging, when recent soft Q2’16 GDP results (+1.2% actual vs. +2.6% expected) are considered, it doesn’t seem like enough to spur a Fed rate hike.
According to this week’s minutes at its July meeting, the Fed policy committee was divided as to the appropriateness of an immediate rate hike. There was a general level of comfort with the state of the American economy, in particular, the labour sector. However some members felt that risks on the horizon, including potential spill-over from Brexit, suggest that more data/time is needed, to confirm economic momentum, before a hike occurs. A Bank of America analyst called it a ‘placeholder meeting’ and that the balanced tone doesn’t materially change the outlook. Money-markets tends to agree with that sentiment and the pricing in of a rate hike by the end of the year is largely unchanged at about 50%. However currency markets were looking for a more optimistic tone and responded negatively.
As the trading week draws to a close the CPI & Fed minutes related flinch in sentiment has greenback lower by about 1.5% against both the British pound and the euro. This is particularly welcome relief for GBPUSD which was trading near 31-year lows at the beginning of the week.
Speaking of Sterling, British data released this week provided the beleaguered currency a modicum of support after a difficult couple of months since the June 23rd EU membership referendum. Post-Brexit Retail Sales numbers and employment statistics both posted above-forecast this week. The Retail Sales number was attributed to a bounce back from last month’s dramatic decline alongside high street summer sales spending. Meanwhile, the labour statistics, showed over 8,000 fewer people applied for unemployment benefits in July than did in June. The outcome indicates a degree of resiliency in the UK employment market, and has spurred murmurings as to if the risks from Brexit have been overblown; it seems only time will tell. As it stands, GBPEUR continues to hold in the vicinity of multi-year lows and GPBUSD, while higher this week, remains contained by a down-trending range.
Next week brings both the UK and the US’s Q2’16 second GDP reading. If these figures are to deviate from the first reading (+0.6% & +1.2% respectively), movements in the market are likely. Otherwise, currency markets will pay the data little attention. Next week we will also see the Jackson Hole Symposium. Every year since 1978, the Fed has sponsored a conference on a significant economic issue facing the U.S. and world economies. Prominent central bankers, finance ministers, academics, and financial market participants from around the world will be attending. Significantly, following her absence from last year’s symposium, the Federal Reserve Chair, Janet Yellen, will be speaking. All ears will be listening for any hint of changes in monetary policy for the rest of the year. A fun fact: The conference was moved to Wyoming in 1982 to lure Fed Chairman Paul Volcker, an avid fly fisherman. Doubtful that the prospect of fly-fishing is responsible for Yellen’s participation this year; make no mistake, all eyes and ears will be on Yellen who will definitely be the catch of the day.
The topic of this year’s conference is “Designing Resilient Monetary Policy Frameworks for the Future”. Namely, what lessons have been learned from years of extraordinarily accommodative global monetary policy since the global financial crisis? However, a hot button topic amongst central bankers recently is fiscal policy. The likes of the Bank of England and the European Central Bank have both called loudly for support from elected officials. The fact is that monetary policy wells are starting to run dry following years of ultra-loose monetary policy. Finally, the discussion surrounding the risks to the global economy of Brexit (both short and long-term) is also likely to be raised.
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