Sterling higher on Trump comments but further gains difficult

For Mark Carney, the Governor of the Bank of England, Wednesday cannot come quickly enough. In a couple of days, Parliament rises for its summer recess and Brexit, despite negotiations continuing in the background, can be put to bed for a couple of months and he can concentrate on the economy.

Recent economic data has virtually assured traders that their vision of a rate hike next month will not now be realized. Last week’s employment, inflation and retail sales data were uniformly weak and when added to the uncertainty surrounding Brexit mean that an emergency cut is more likely than a hike. With Ian McCafferty leaving the MPC, a more dovish committee is going to oversee monetary policy leading into Autumn which is probably no bad thing.

The impossibility of the Brexit negotiations will return to haunt the currency in September and if it were not for President Trump’s intervention, the pound would probably be below 1.3000 versus the dollar already. It closed on Friday 1.3130 having reached a low of 1.2957 on Thursday. Since the euro makes up a significant proportion of the dollar index, it fell further versus the dollar than the pound. The consequence of this is that the pound also gained against the single currency, reaching 1.1210 following its fall to 1.1168 on Thursday.

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Trump’s comments to be short-term driver for dollar

Jerome Powell, the Chairman of the Federal Reserve was Donald Trump’s first and only choice for the role when he took over from Janet Yellen in February. One of Trump’s criticisms of Yellen was that she was indecisive in deciding Fed policy as the economy emerged from the financial crisis. That is a charge that cannot be levelled at Powell who has set the Fed on a clear and definite path towards a “normalization” of monetary policy through a series of rate hikes and advance guidance that provides markets with a degree of certainty.

President Trump has decided that he now believes that rate hikes could be damaging for the economy and blames other economies for not keeping pace with the U.S. with the effect that the dollar is gaining in strength.

Presumably the President is in regular contact with the Fed Chair and is informed in advance of the Central Bank’s thinking. Tying together trade and monetary policy is difficult, and Trump sees a link between the U.S. trade deficit and the strength of the dollar which sucks in imports.

Currency manipulation is a hard issue to prove since it is always tied to monetary policy. For instance, the ECB, without question, is satisfied that the euro is weaker since it allows them (conversely to the U.S.) to export more. However, it is inconceivable that the ECB could decide to keep rates low, despite the withdrawal of the Asset Purchase Scheme simply to drive the currency artificially lower.

The dollar index fell on Friday following the President’s comments late on Thursday evening. It has barely moved overnight (0600 BST) remaining close to Friday’s close of 94.46.

ECB won’t provide support to single currency

As President Trump made his comments regarding U.S. monetary policy on Thursday evening and added veiled threats about currency manipulation, members of the ECB Governing Board must have smiled wryly to themselves safe in the knowledge that at this week’s ECB Policy Meeting they will continue to do exactly what Trump has accused them of.

It is difficult to accuse the ECB of manipulation since even the Bundesbank seems to agree with the current monetary policy being adopted by the Eurozone’s Central Bank, and their anti-inflation credentials are well known.

This week’s meeting will have an end of term feel about it as the members of the committee disperse for the summer vacation. It will confirm the removal of the Asset Purchase Scheme starting in September and while pronouncing themselves satisfied with the level of the currency, will confirm that there will be no rate hikes until Autumn 2019.

Such dovishness will push the euro towards support at 1.1550 versus the dollar and see the pound rally towards 1.1280.

The outlook for the euro looks to be calm and unless the immigration issue blows up again it is likely that the combination of dovish monetary policy and a lack of political factors will continue to encourage traders to sell on rallies.

On Friday, following President Trump’s comments it rose to 1.1739 before settling back to close at 1.1722.