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Greenback defensive – all eyes on FOMC and Brexit risk

Currency-Market-Update-Wednesday-2
Albert Edwards
by Albert Edwards on July 31, 2019

CURRENCY MARKET UPDATE

U.S. dollar highlights:

USD under pressure as markets wait for the Federal Reserve Interest Rate announcement. The Fed is expected to make a 25bps rate cut to prolong the current economic expansion; meanwhile, the economy is still under threat due to global growth and trade concerns. Markets have priced in a 20% chance of a 50bps rate cut currently after President Trump said the Fed raised rates “way to early and way too much”. Trump also said that a “small rate cut is not enough”. Trade talks with China have resumed (after breaking down in May) in Shanghai as the world’s two biggest economies have agreed to a truce since the G-20 summit. Uncertainty about whether an agreement can be finalized will affect markets the rest of 2019. Meanwhile, existing tariffs remain and will continue to affect businesses, and tensions with Huawei Technologies have escalated. Chairman Powell will indicate more policy accommodation in the future and an early end to unwinding the balance sheet. Trump also complained about the exchange rate, so more cuts are anticipated (in September).

Canadian dollar highlights:

CAD trading defensively as markets wait for the May GDP report today (expecting 0.2% advancement monthly and previously 0.3% in April). Producer Prices for June expecting 0% monthly and 0.6% yearly. Support for CAD has mainly been due to higher oil prices and the central bank remaining dovish and patient regarding interest rates. China’s Vice Premier Liu He will meet with U.S. Secretary of the Treasury Steven Mnuchin and trade representative Robert Lighthizer.

Euro highlights:

EUR stable after France GDP increased 0.2% quarterly in Q2 (lower than expected 0.3% gain). Meanwhile, German Consumer Confidence for August was only 9.7 reading (from 9.8 previously in July). The Eurozone’s largest economy continues to be affected by the U.S.-China trade feud. GDP Growth Rate for Q2 expecting 1.1% increase yearly (previously 1.2%). Markets will focus on the Inflation Rate for June (expecting 1.2% increase) and the Unemployment Rate (expecting 7.5% and same as previous month). The current Eurozone jobless rate is the lowest since July 2008 as the number of unemployed citizens continues to decline. Markets are also expecting the European Central Bank will need more monetary policy in September and follow the Federal reserve with a rate cut (in addition to quantitative easing).

British pound highlights:

GBP reached a two-year low and remains vulnerable due to an increased risk of a no-deal Brexit since Boris Johnson replaced Theresa May as the new Prime Minister. Markets are not confident any progress will be made to reach the October 31 deadline with a deal (due to Johnson’s “do or die” stance). Johnson may also encourage an early election to try and win a stronger majority (which will delay Brexit again).