Powell all but confirms 25bp, so market considers 50bp

The interest rate futures markets continue to price in a 100% certainty of a 25-basis point rate cut in a few weeks’ time at the next FOMC meeting. However, following yesterday’s first day of testimony before Congress by Fed Chairman Jerome Powell, traders, like greedy children, have increased the chance of a cut of 50 basis points to around 30%.

The testimony remained ambiguous as Powell confirmed that the FOMC would act as appropriate but sounded more optimistic about the economy going forward, this makes a 50bp cut all the more unlikely.

Since there was room for interpretation, the market took full advantage taking the opportunity to push the dollar back close to pre-NFP levels as rate-cut fever returned.

One of Powell’s colleagues, Fred Bullard, the St. Louis Fed President, was also speaking yesterday, calling for a cut in rates to give a “little nudge” to inflation pushing it back towards the Fed’s 2% target.

The minutes of the last FOMC meeting were released with one member (Bullard) voting for a 25bp cut but overall the committee felt that, while they acknowledge the downside risks to the economy, the necessity for a rate cut was not yet present and further data would be needed.

It is difficult to align all the comments being made now as the data since the meeting has been “fairly supportive” for the economy, yet rate cut expectations have, if anything, strengthened.

Yesterday, the dollar index fell to a low of 97.03, closing at 97.13. Overnight, it has continued to fall reaching a low (05.30 BST) of 96.83.

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Johnson criticized for “throwing Ambassador under the bus”

The diplomatic spat between London and Washington claimed it’s first (and probably only) victim yesterday as the UK’s Ambassador to Washington resigned following the leaking of emails he sent to London criticizing the U.S. Administration in no uncertain terms.

It is being reported that Sir Kim Darroch resigned following the lack of support he received from Boris Johnson at the recent televised debate. While it may have been an inappropriate subject to have been raised at such a forum, Jeremy Hunt, as Foreign Secretary, made no secret of his support for Darroch and Theresa May, yet Johnson was more reticent declining to comment either way.

As the contest to be the new Leader of the Conservative Party draws to a close, the Candidates well aware that most votes will now have been cast, have cast off their “cloaks of propriety” and become less concerned about policy and more personal in their comments about each other.

The pound continues to fall versus the euro Its appreciation versus the dollar yesterday was simply a reaction of the effect of Jerome Powell’s testimony on the dollar. Yesterday’s data was in line with expectations with both industrial and manufacturing numbers improving from May. This is backwards-looking data while the more progressive Purchasing Managers Indexes show a worrying decline primarily due to concerns over a no-deal Brexit.

As the odds continue to favour Boris Johnson winning the election his more controversial and confrontational manner will lead to greater volatility for the currency but overall the trend remains for new lows versus both the dollar and euro.

Yesterday, the pound rose against a weaker dollar making a high of 1.2522, closing at 1.2499. Versus the single currency, it fell to a low of 1.1098, closing at 1.1113.

German economic woes continue to be a significant factor for Eurozone

Several analysts are predicting that the slowdown in the Eurozone economy will continue throughout the remainder of 2019 and well into the first quarter of next year., One of the more significant factors is the continued inability of Germany to grow at a sufficient rate to support the rest of the region.

The economy has been left to its own devices over the past few months despite various predictions over stimulus and greater accommodation.
Politics has taken centre stage.

The elections to the European Parliament have shaped how the decision-making process will be ultimately more difficult. With a wider range of Political Parties taking seats in Strasbourg, there will be more opportunity to advance several agendas which can only slow the overall process.

This has been followed by disputes over the candidates for the top jobs. It was clear for some time that German Chancellor, Angela Merkel wanted a German to take the role of President of the European Commission to replace Jean-Claude Juncker. When her first nominee was declined, she quickly found a replacement.

The appointment of the next ECB President was also difficult as it appeared that in order to have her candidate receive the Commission Presidency, Mrs Merkel had to agree to a French Candidate. During the Presidency of Mario Draghi, it had been widely assumed that a German would become his replacement, with Jens Weidmann the Bundesbank Head, generally accepted to be nominated.

Following the deal between Merkel and Macron up steps Christine Lagarde who like her colleague in Washington brings a different skill set to the role, not being an economist or having any previous Central Bank experience.

There can be little doubt of the size of the task facing Lagarde as she tries to navigate the region back towards sustainable growth. The “toolbox” is empty, and the job will require a certain degree of imagination particularly since the growing banking crisis will also require immediate attention.

Yesterday, the euro benefitted from the fall in the dollar. This is likely to be a temporary relief with expectations for a break of 1.1000 growing every day. It reached a high of 1.1264, closing at 1.1250.