Good morning,
Yellen to drive home point that politics is beneath the Fed
In a week thin with data, focus has shifted to central banks – and today is the busiest of the week. In the next 24 hours, markets are scheduled to hear the opinions of 8 different central bankers including the US Federal Reserve, the European Central Bank and the Bank of Japan. Any fireworks today are likely to be set off by Fed chair Janet Yellen, who appears before US Congress to update lawmakers on the current state of the economy. She’s likely to reiterate her view that party politics is beneath the Fed, repeating that they respond to risks present in the economy, not risks present in the White House.
This comes despite speculation that the Fed will hold fire on any rate move in November due to the contentious Presidential race. But, history is on Yellen’s side; the Fed has raised/lowered interest rates in the same month as an election on five occasions since 1980. Nonetheless, the market sees less than 10% chance of a hike in November, but judges December at 50:50, indicating that they believe the Fed will hold fire while the risk of Trump in the Oval Office and the inevitable financial volatility that would follow is still live.
Draghi under fire from Sceptical German lawmakers
ECB president Mario Draghi will face a grilling today as he attends a closed-door meeting with the German lower house of parliament. This is his first appearance in front of the German lawmakers in almost four years and he’s likely to face relatively simple questions like “why is the European economy still suffering despite receiving record-breaking levels of stimulus for almost a decade?”. Unfortunately, these questions won’t have simple answers and Draghi is likely to reiterate that monetary policy can only go so far while certain Eurozone governments (read: Germany) stubbornly hold back spending to the detriment of Southern Europe. Fortunately for Draghi he will have some allies in the room, with SPD lawmaker Schaefer recently commenting: “Without Draghi’s monetary policy there wouldn’t be a Eurozone anymore.”
Europe’s banking woes and Brexit jitters to keep the dollar strong
The US dollar has gained this week, keeping pressure on GBP/USD which continues to flirt with post-Brexit lows below 1.29. Similarly, concerns surrounding one of Europe’s largest, and certainly one of the most systemically important, financial institutions, Deutsche Bank, has kept the euro on the backfoot. While these risks remain present, it’s hard to see a set of circumstances where the dollar doesn’t gain from here. Over the next 45 days, markets will continue to watch opinion polling surrounding the Trump-Clinton race as voters have been reluctant to switch allegiance despite what was roundly seen as a drubbing of Trump at Monday night’s debate.
Have a great day.