Good morning,
Dollar drip continues
Despite the Federal Reserve being the only developed world central bank to be actually delivering on rate hikes, the dollar’s poor performance extended further yesterday. Fears over the future performance of the US economy, inflation and the so-called ‘terminal interest rate’ (the rate that the Federal Reserve will eventually settle at) have dented the dollar in recent weeks. So much so, that the trade-weighted dollar index now sits close to its lowest levels since October of last year – thereby completely erasing the ‘Trump trade’ that saw speculative flows drive the dollar higher on hopes of infrastructure spending and tax cuts.
So what’s changed? Inflation’s been falling since February, GDP growth isn’t close to the levels seen ahead of the Presidential election and the sclerotic nature of Capitol Hill has made sure that Trump’s failed to deliver on any of the big ticket economic reforms he promised during his campaign. The result of this change (or lack thereof) is that markets aren’t expecting much further from the Fed. Markets still see a close to 30% probability of nothing coming from the Fed for the next twelve months, which would represent a sharp climbdown from the rate-tightening trajectory seen this time last year.
Bank of England chasing its tail
Given a lot of the confusion around central bank speakers this week (from the Fed to the ECB to the BoE), you’d have thought central bank members from across the spectrum would’ve realised that they need to be particularly careful with their language while markets are so sensitive. It appears that lesson hasn’t been learnt at the Bank of England just yet. Andy Haldane, the Bank’s chief economist stated that the Bank need to “look seriously at raising rates” – which was quickly followed by the MPC member commenting that “rates are happy where they are”. Nonetheless, sterling managed to pop higher and now GBP/USD sits above 1.30 for the first time since May.
The day ahead
There’s relatively little on the economic calendar today to interest markets. The final reading of UK GDP today is expected to come in unrevised and uneventful and as such focus will remain on the political backdrop in the UK and the continued rotation away from a Fed-focused market into something more oriented around a higher global rates environment.
Have a great day