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Investors in wait-and-see mode ahead of next week’s ECB meeting
Trump has killed the US dollar bulls, earliest respite on 7 September
After tumbling against most majors yesterday amid heightening tensions between North Korea and roughly the rest of the world, the US dollar pared losses on Tuesday as the overall risk sentiment improves. The dollar index printed a multi-year low yesterday as it fell 0.70% to 91.64, the lowest level since January 2015. On Wednesday, the index bounced back 0.25% to 92.45 amid a sell-off in the Japanese yen and the single currency, down 0.35% and 0.18% respectively.
Over the last couple of weeks, the FX market was mostly driven by the twists and turns faced by Donald Trump, as well as speeches from central bankers. This week, the market’s attention will shift towards US economic data. Indeed Fed members are expected to remain quiet over this week - only Powell will speaks at a conference this afternoon.
Today traders will be watching ADP employment changes (185k expected, 178k prior) and second quarter GDP (second estimate) which is expected to print at 2.7%q/q (annualized). On Thursday, the show will continue with the release of personal income and spending, which are both expected to have improved in July, expanding 0.3%m/m and 0.4%m/m respectively. Then the Fed’s favourite measure of inflation, core personal consumption expenditures, should have eased further in July as economists expect a reading of 1.4%y/y. Finally, July’s NFPs (180k exp and 205k prior), together with the complete jobs report, will be published on Friday.
GBP Recovery Unsustainable
GBP recovered slightly, however the correction is more likely short term then a structural shift. GBPUSD is consolidating around the 1.30 handle while EURGBP in a bull channel has no real resistance till 0.9415. The Bank of England remains dovish which corresponding to market pricing. Expectations of Interest rate hikes remain low with hikes only hitting the markets in late 2019. Despite improving inflation outlook, we don’t anticipate the BoE will shifted into full tightening mode until there is clear political direction around Brexit. A majority of GBP TWI is comprised of EUR, therefore the large overshot in EURGBP will worry BoE policymakers and decelerate improving inflation outlook.
Brexit talks and splashy headlines will dominate the GBP directions yet division over unity feels in control, as the details of Brexit bill have been slow coming. October UK party conference will help provide clarity on the depth of political discourse. Investors will be watching German elections and UK October conference cautiously signals by key politicians (note, tough talk on Brexit generally scores easy political points). We see UK domestic economics to take a backseat to politics, which will weigh on GBP. In regards to Europe, pro-EU, deeper financial integration comments from Germany’s Merkel and France’s Macron suggest that a decisive Merkel victory is likely to lead to stronger Euro. EURUSD above the 1.20 and our favorable outlook for European economic and political conditions indicate further upside for the pair.