Dollar index gaining a foothold

The recent meeting of the FOMC gave the markets a clear indication that the Fed is considering a rate cut as soon as its next meeting at the end of next month. However, Fed Chairman Jerome Powell in his annual testimony to both Houses of Congress appears to have fallen back into his data-dependent rhetoric.

Having virtually told the financial market that since it sees the same data as the Fed it should make its own mind up, they appear to have come up with a different conclusion. It may be blatant self-interest but having been given a whiff of an interest rate cut the market is almost baying for a series of cuts. The biggest supporter of the market’s view is President Trump who again turned upon Chairman Powell yesterday, criticising him for “trying to be tough”. In what may be considered the ultimate put-down, Trump said that the Fed “should have Mario Draghi instead of our Fed Person”.

It is unclear whether the President would prefer the Eurozone economy right now!

It is certain that the market has got way ahead of itself in considering a series of rate cuts by the FOMC and there is a growing feeling that through its rate outlook and advance guidance the Fed is allowing the market to do its job for it. The fall in the dollar index has not however been copied by the stock markets which are again stalling at the recent highs and technically look like correcting lower again.

Overnight, there is a report in the Hong Kong press that the U.S. and China have agreed a truce in their long-running trade dispute. There has been no official confirmation of this so far, but it adds to the interest being generated by the meeting of Presidents Trump and Xi at the upcoming G20 meeting in Tokyo.

Yesterday, the dollar index continued its three-day rise reaching a high of 96.38 and closing close to that level.

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Leadership Candidates move to issues other than Brexit in latest Hustings

Brexit remains the most important issue facing the new Prime Minister when he is elected towards the end of next month. Despite this, in the latest meeting between the two candidates, Jeremy Hunt and Boris Johnson, they answered questions about other major issues.

Both unveiled pledges over education and immigration. Johnson is looking to introduce a points-based immigration system similar to what is used in Australia. This is a clear follow on from Brexit and would form part of the post-departure planning.

Hunt meanwhile pledged to end tuition fees for students who become young entrepreneurs starting their own businesses. The campaign went high-tech last evening as the “digital hustings” were broadcast on the Party’s Facebook and Twitter pages.

Johnson claimed he was open to talent being attracted to the UK, but immigration needs to be controlled. “No one should be allowed to claim benefits upon arrival in the UK and they should only be able to claim due to a change in their circumstances”.

While MPs will want to know the policies and commitments that the new leader will drive, those voting in the next few weeks will remain transfixed by Brexit. There is also already a move in Parliament, apparently supported by up to twenty Government MP’s to block a no deal Brexit.

While the campaign has entered a more transitory stage as the candidates try to woo members, the pound remains in a state of flux over Brexit, as seemingly does Parliament.

It remained in a very tight range versus the dollar yesterday, trading between 1.2662 and 1.2708, closing at 1.2689. With little new information to provide impetus in either direction it is relying on the dollar for any increase in volatility.

The return of the Romans!

The “Italian issue” returned to haunt Brussels as a senior member of Matteo Salvini’s team said that the idea of an alternative currency for domestic use was “taking shape”. This may be little more than a “shot across the bows” of the EU as it considers fining Rome for budgetary transgressions, since economic advisor Claudio Borghi also said he expected Italy’s budget deficit to be at 2% by the end of the year, far better than had been predicted.

Borghi is President of the Budget, Treasury and Planning Committee of the Lower House of the Italian Parliament. He was instrumental in setting up the agreement between The League and Five Star to govern in coalition.

The Eurozone continues to be plagued by political upheaval as well as economic turbulence which is driving nationalist movements who question the whole premise on which the region is based. For some the whole integration has taken place too quickly and the entire “one size fits all” budget and monetary policy regime is strangling individual economies.

It is the nature of some to question any innovation but until there is a pickup in economic activity which has been continuing to weaken despite record levels of accommodation, rumblings of discontent will continue.

The next ECB monetary policy meeting will be crucial. The Central Bank is quickly seeing time run out on its need to do something positive to drive the economy forward. It is, however, hamstrung by the need to accommodate a diverse group of countries who each need a different level of support.

Should the rumours of a truce in the growing trade dispute between Washington and China be proven true, it will give an enormous boost to the prospects for the region and see a significant rally for the single currency.

Yesterday it also traded in a narrow range between 1.1391 and 1.1347. It closed at 1.1370, just two pips above the open.