Fed independence under threat

President Trump in an interview last evening with a prominent financial news station voiced his concern over the strengthening dollar and the pace of interest rate rises.

He commented that he was worried that a strong dollar puts the U.S. at a disadvantage as the Chinese currency is “falling like a rock”. Trump also said he was concerned about the pace of interest rate rises which could hit the country’s competitiveness.

The reaction of the euro which has been “flying beneath the radar” in recent weeks was muted as there is little that the President can do since it is hardly being manipulated. It is without question that it is the pace of rate increases that is driving the dollar higher and not any monetary policy decision taken in Frankfurt.

The dollar index is currently (0600 BST) at 95.10, close to its recent highs while the single currency remains becalmed at 1.1653, following the President’s comments, having risen from yesterday’s low of 1.1574.

Jerome Powell, the current Chairman of the Federal Reserve spoke recently about the importance of the independence of Central Banks as they can react to the administration’s actions rather than being a part of those actions, making monetary policy more responsive.

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Weak data again pushes Sterling lower

The pound fell to test the 1.3000 level versus the dollar yesterday as retail sales data for June was weaker than expected. Retail sales fell by 0.6% last month with the year on year figure reaching just 2.9%.

Short term traders are now extremely “short” of Sterling. This often means that any further falls are limited without a corrective rally. This week has been uniformly bad for the pound on an economic basis without considering the political situation.

While the unemployment rate carried a hint of good news, that is tempered by the fact that it is hard to compare the current data with past releases given the way the numbers are “massaged” by the Government. They rename the unemployed, particularly under twenty fives as being “in education” since they are often attending compulsory training courses and receiving grants rather than unemployment benefit.

The rate of both wage and consumer inflation disappointed traders who clung to the hope of a rate hike next month. Those hopes were further dashed by comments from Mark Carney, the Governor of the Bank of England in which he said that any significant shift in the prospect of a Hard Brexit could lead to an emergency rate cut.

Hard Brexit concerns threaten Sterling

While the pound has fallen following a set of weak economic numbers this week, it has received underlying support from traders’ expectations that eventually an agreement could be reached by politicians over proposals that would mean a soft Brexit.

As further damaging comments are made and Brussels considers the “Chequers Proposal”, the chances of something emerging that satisfies the two opposing wings of the Government and Michel Barnier, the Chief EU Negotiator are fading.

The EU clearly wants the UK to be part of the single market but must take a hard line over the four freedoms to discourage other members who may be faltering from moving further towards nationalism.

I wrote a few weeks ago that Sterling would do well to end this month above 1.3000 versus the dollar and it is clinging to that level having reached a low of 1.2957 yesterday before bouncing back to close at 1.3016. It is obvious that President Trump’s words overnight were directed at Beijing, Tokyo and Frankfurt but they gave a slight nudge to the pound as well. It has lost considerable ground versus the single currency reaching a low of 1.1168 yesterday and has continued to look fragile overnight. The pound is currently (0600 BST) trading at 1.1172.