Dovish FED & ECB To Strengthen Sterling?
Sterling maintained a firm tone yesterday as no significant data releases were due on the docket. Markets are still somewhat uneasy over UK fundamentals with a particular focus on the labour markets but the firm tone in global risk appetite continued to provide support with expectations of very dovish policies from the Fed and ECB also providing Sterling support as trading volumes remain low.
Despite reports of the lack of progress in trade talks, EU Chief Negotiator Michel Barnier reiterated that a deal was needed by the end of October, although markets suspected the potential for further slippage.
The Euro lost ground during the day with Sterling pushing up to 1.1176 whilst initially dipping to 1.3117 against the Dollar before rising above the 1.32 mark during the US session. The Pound is currently holding firm around the 1.3210 with choppy movement likely later in the day.
US durable goods orders increased 11.4% for July after a 7.7% increase the previous month and well above consensus forecasts of 4.3%. There was a jump in transport orders and underlying orders increased 2.4% compared with market expectations of a 2.0% increase. Non-defence capital goods orders strengthened 10.2% following a 15.5% decline the previous month. The dollar secured gains following the US data with the Euro also registering significant losses. The single currency dipped to lows near 1.1770 against the US dollar and lost ground on the crosses, although there was a quick reversal with a move back above the 1.1800 level.
Kansas City Federal reserve (Fed) president George stated that there was a growing risk of a double-dip recession if the coronavirus pandemic intensifies. Richmond Fed President Barkin stated that jobs in most sectors are down 5-10%, maintaining generally cautious rhetoric, although markets were waiting for comments from the Fed Chair.
There was further caution ahead of Fed Powell’s speech later today. He is due to outline the medium-term policy framework with markets expecting references to targeting a higher average inflation rate. The dollar will be vulnerable to a dovish slant while a more cautious tone could trigger short covering and there is the potential for volatile movements.
Concerns continue over further Euro-zone coronavirus developments with Italy recording the highest number of daily new infections for over three months whilst an official ECB council member has stated that the bank has room to wait for hard data and that it is not obliged to use the whole PEPP envelope.
The Euro gained some support from the German announcement of a fresh fiscal stimulus with France also set to announce plans next week.
The Euro consolidated around 1.1815 at the European close, gaining slightly after a German announcement of a fresh fiscal stimulus support package. The Euro has settled around 1.1820 in early Europe as the Dollar continues to struggle in gaining any traction.
Data to watch
13:30 – USD – Prelim GDP
13:30 – USD – Unemployment Claims
14:10 – USD – Fed Chair Powell Speaks
15:00 – USD – Pending Home Sales