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Greenback stronger after Fed signals pause with rate cut

Albert Edwards
by Albert Edwards on August 01, 2019


U.S. dollar highlights:

USD higher after the Federal Reserve cut interest rates by 25bps for the first time since December 2008 (as expected). Fed Chairman Jerome Powell stated that this is not the start of an easing cycle and this gave USD support. Low inflation and increased trade tensions encouraged the central bank to consider more monetary stimulus; however, employment, economic growth and consumer confidence have been strong. In addition, wages are currently rising at the best pace in 10 years while jobless claims are at a five-decade low, indicating the economy does not need the support from a rate cut. Inflation remains below the 2% target and previous quantitative easing measures prevented deflation. The Fed is concerned about a slowdown in global growth due to Bexit and the ongoing trade dispute with China. Trade talks between U.S. and China have concluded and will continue in September. One of President Trump’s demands was Chinese purchases of American farm products. Powell will continue depending on economic data to determine the next move; however, markets have reduced expectations of the next rate cut, causing USD to rally higher again.

Canadian dollar highlights:

CAD strengthened (temporarily) after the economy advanced 0.2% in May (higher than expected 0.1% and previously 0.3% in April). This represents the third consecutive month of improvement for GDP with manufacturing expanding 1.2%. Meanwhile, Producer Prices for June decreased 1.4% monthly and 1.7% yearly (previously revised to -0.1% monthly and 0.4% yearly in May). Crude oil prices continue higher to also support CAD. Although GDP was better than expected, there is still a deacceleration in the economy and CAD will be vulnerable.

Euro highlights:

EUR weaker after GDP Growth Rate for Q2 was 0.2% quarterly (as expected), indicating the slowdown continues. This was the weakest growth rate since Q4 2013. Inflation Rate for July was the lowest since February 2018 at 1.1% yearly (Core Inflation was 0.9%) and the Unemployment Rate for June lowered to 7.5% (previously 7.6% in May). Manufacturing Index for July expecting a 47.6 reading today. The European Central Bank is expected to begin a new round of economic stimulus and cut interest rates, keeping EUR defensive.

British pound highlights:

GBP continues weaker and remains under pressure due to the risk of a no-deal Brexit increasing. Markets will focus on the Bank of England’s Interest Rate decision (expecting 0.75% and same as previous) and Monetary Policy Committee meeting minutes. The central bank will gradually increase rates and lowered its outlook for the economy from 0.2% to zero (despite Brexit uncertainty and global trade tensions).