Did the Fed mislead or did the market get too excited?

The story of the Fed’s intentions at its meeting last month will finally see closure tomorrow as the minutes of the meeting are published. In the immediate aftermath of the meeting, Chairman Jerome Powell used language that led traders to believe that not only was the FOMC about to cut rates at its next meeting, but this would be the first of a series of cuts.

While it is generally accepted that the third hike last year as “overkill”, and its reversal long overdue, the Central Bank’s intentions have been far from clear since the meeting. So it remains, as Powell goes to Washington today to provide testimony to Congress, followed by several of his colleagues who will also speak this week.

Jerome Powell confused the market further in a recent speech by quoting Benjamin Franklin’s famous remark that “an ounce of prevention is worth a pound of cure.” It remains to be seen what is considered prevention and what is considered cure.

Of course, having seen a set of employment figures that were positive if not stunning, the market is beginning to overthink and overanalyse the data to try to get “inside the Fed’s head”.

Three more FOMC members will speak today. There is no reticence being exhibited to “get the message out there”. It will be interesting to note just how the market interprets all four sets of comments to try to disseminate any shifts in policy.

The dollar continued its robust post-NFP rally yesterday, reaching a high of 97.42, closing at 97.37.

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Remember Brexit? The silence is deafening!

As far as Parliament is concerned, any negotiations, deal-making and potential solutions to the Brexit impasse have slipped underground. No Member of any Political Party is prepared to “pop their head above the parapet” while Boris Johnson and Jeremy Hunt slug it out to become either the arbiter of a no-deal Brexit or the reincarnation of St George who will slay the EU dragon.

The market has a couple of weeks to position itself for two defining events in the last week of the month; the decision on the new Prime Minister, followed by the Fed’s interest rate decision.

Traders are not feeling the slide into “holiday mode” yet and while August is traditionally the slowest month of the year, it could start with fireworks.

The likely “coronation” of Boris Johnson will bring major concerns to all parts of the EU. They can expect to return from their Tuscan villas, Bavarian hideaways and Provencal estates to some very stark choices that they thought had been dealt with many months ago.

The pressure to reopen Brexit negotiations will lead to a simple choice. If Johnson (or possibly Hunt) demonstrate a straight decision between revisiting parts of the Withdrawal Agreement and no deal, it is feasible, however unlikely it seems, that Brussels, in its current state of flux, could blink first. It is hard to see how any new deal could be negotiated before October 31st, but it could be that high-level agreement may be followed, in the post-departure period, by the filling in of several blanks.

It is unclear just how many rebellious Conservative MPs there will be, but to start the new PM’s tenure with a revolt could lead to a potentially disastrous General Election. While the opposition appears to be in disarray over several issues, a General Election could become both a proxy for a second referendum and a defining time for the two-party system’s obvious malaise.

As the pound awaits the result it continues to fall versus both the dollar and euro. Yesterday, it reached a low of 1.2499 versus the dollar, closing at 1.2518. While against the single currency, it closed virtually unchanged at 1.1162, having reached a low of 1.1143.

EU considering Lagarde’s appointment as its “global opportunity”

While avoiding any real decision on measures to provide accommodation and stimulus to the Eurozone economy, both the ECB and EU Commission have recently spent their time mulling over just how to promote use of the euro in a wider, global, capacity.

The days of heralding the single currency of a genuine rival to the dollar as the global reserve currency are long gone, and it may be that the chance of a true rivalry to the greenback is going to fall far further east.

However, the fact that the compromise candidate to head the ECB, Christine Lagarde, may be able to use her more “global status” and contacts made as the Managing Director of the IMF could give the Bank a more believable status. The promotion of technocrats has not allowed the ECB to flourish as it could have done despite the issues that have faced it.

One of Ms Lagarde’s first tasks may not be found within her skillset. If the actions of Deutsche Bank are a proxy for what is happening below the surface of the Eurozone’s banking network, she may be faced with a systemic issue which will require urgent and, possibly, unpalatable solutions.

Meanwhile, the single currency continues to meander lower versus the dollar, much to President Trump’s chagrin. Although, despite the competitive advantage to exporters of a weaker currency, Eurozone -wide industrial and manufacturing production fails to grow out its recent contraction.

Yesterday, the euro made a low of 1.1206, closing at 1.1214.