Greenback steady as bets on rate cuts are reduced

White House advisor and former TV economist Larry Kudrow commented yesterday that the market was telling the Fed what it expects it to do over short-term interest rates. Kudrow seems to be singing from his boss’s hymn-sheet as he has no doubt experienced battles between traders and the Fed before. The Fed never loses.

It may very well be that the last of the three hikes last year was a step too far with the FOMC either being overcautious or simply deciding to defy President Trump who was vocal in his desire for rates to remain on hold.

With summer coming, it is going to be a long hot month for Fed watchers as they await the next FOMC which won’t be held until the final days of the month. The likelihood is still that there will be a rate cut but successive members of the FOMC have commented that either a 50bp cut in July or successive cuts will prove to be excessive.

The dollar index has apparently reached a short-term bottom although two upcoming events could move it in either direction. The G20 meeting may throw up some interesting comments while the meeting between Presidents Trump and Xi could, according to several rumours, end in a truce between the two nations over trade.

The dollar index reacted positively to comments from St Louis Fed President James Bullard, who backed Jerome Powell’s testimony to Congress, saying that a quarter-point cut would be a wise “insurance” move. However, he didn’t see the need for a half-point cut, commenting “I think 50 basis points would be overdone.”

The index closed virtually unchanged at 96.21 having traded in a narrow range all day.

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Political uncertainty still the main Sterling driver

Boris Johnson and Jeremy Hunt are both Conservatives but that is where the similarity between them ends. On Brexit, Johnson is promising a firm commitment to leave on 31st October come what may, while Hunt is channelling his inner Theresa May by intimating that departing by that date would be ‘nice’ but adding several caveats.

Hunt has been a Government Minister ten years but there is very little known about him. Johnson is far more ebullient (except when he is avoiding the newspapers). Johnson considers himself a man of the people who can get things done. He was praised from many quarters for his work as London Mayor but still draws criticism just for being Boris Johnson.

There is little doubt that Jeremy Hunt would be the safe pair of hands but that was supposed the be the title given to Theresa May too and that wasn’t particularly successful.

As the vote approaches there is no doubt that there will be plenty of jockeying for position with so many Cabinet seats up for grabs, but the ballot remains Boris Johnsons to lose.

Sterling remains in the eye of the storm buffeted by its G7 rivals. It would be glib to say that the pound’s fate would be stronger with Hunt while the opposite would be true of Johnson. However, if Johnson were elected and managed to bully Brussels into re-opening talks and possibly getting an agreement, he would be seen as a considerable statesman. That is, of course, a very big if.

The pound fell a little versus a stronger dollar yesterday, reaching a low of 1.2664, closing at 1.2670. It also fell further versus the single currency reaching a low of 1.1139, closing at 1.1147.

Inflation unlikely to drive the euro

ECB President Mario Draghi has spent an inordinate amount of time so far this year promising that inflation would start to pick up driven by higher wages. His claims have become more plaintive as each month has gone by until he has finally admitted that some form of accommodation may now be advisable since wages have barely grown.

Tomorrow sees the release of inflation data for Germany which is likely to remain steady at 1.3% year on year. Even the Bundesbank cannot be too concerned about the level of inflation despite its inflation-fighting credentials.

It is true that Sr. Draghi could barely have predicted that global growth would slow so dramatically or that the U.S. China trade spat would develop as it has.

The single currency remains in a downwards pattern versus the dollar despite its quite astonishing gains versus the pound. It has gained on 30 of the last 39 trading sessions.

With liquidity extremely high and volatility very low, traders are having to hang on to positions for longer as risk/reward remain heavily skewed. The current scenario allows them to do that as the market lacks clear enough indicators for larger, market-moving positions to be considered.

The euro has traded in a narrow range over the past two days but has closed at or close to 1.1370 in both sessions.