Post date: 07/08/2019 12:44
The Fed's "hawkish cut" decision on Wednesday rattled financial markets, and matters were not helped by a flareup of trade tensions between China and the US later in the week after the sudden imposition of another 10% tariff by Trump. The US dollar rallied against most major peers, buoyed by higher yields after the Fed decision. However, the best performing currency was the Japanese Yen, which benefited from safe haven flows as equity markets worldwide fell. The week was particularly painful for emerging market currencies, weighed down by the Fed's apparent reluctance to curt further and sharp falls in commodity prices after Trump's additional announcement of additional tariffs.
Next week is a typically sleepy August one, without major policy decisions or economic releases to drive markets. A notable development last week was the late recovery in the Euro, which finished the week only slight down against the dollar in spite of the FOMC hawkishness, strong US payrolls and yet more negative news on the inflation front. We are keen to see whether the Euro continues to hold out relatively well this week.
The August meeting of the Bank of England had no major impact on Sterling, as the Bank kept policy unchanged and markets continue to focus exclusively on Brexit developments. Our view that no solution to the Brexit dilemma is possible without a general election was boosted last week when a pro-Remain Liberal Democrat victory on a Conservative seat cut Johnson's parliamentary lead to just one seat. Sterling in fact managed to stabilize last week, ending the week essentially unchanged against the Euro.
The European Central Bank must have been disappointed by the July flash inflation report. Core inflation dropped 0.2% to 0.9%, and is showing no signs of the sustained upward trend it would need to reach the ECB targets. After the disappointing news on PMI indices and inflation, the ECB is now certain to introduce additional monetary stimulus at the September meeting.
It is somewhat surprising the US dollar didn't perform even better vs its main G10 peers than it did last week. In addition to the Federal Reserve surprising markets with a more cautious than expected outlook for future cuts, the payroll report for July was quite strong, and included a positive surprise in wage growth. Perhaps dollar holders were rattled by yet another outburst from Trump in the US-China trade conflict. With little economic news of importance this week, headlines around the Chinese retaliation should drive the US dollar performance.