Sterling jumps on Soft-Brexit possibility
The August UK CBI retail sales index declined sharply to -45 from -16 previously and the weakest reading since December 2008. There was also a sharp underlying dip in confidence, although markets expected some recovery for September. Sterling had stellar performance, soaring over 100 pips (one cent) against the Dollar and Euro after German Chancellor Angela Merkel’s comments were interpreted very positively; indicating that a hard-Brexit can be prevented. French President Macron was also positive in saying he was confident that “something intelligent” can be found within 30 days. However, he also mentioned that any agreement won’t be very different from the existing deal.
GBPUSD rallied yesterday from 1.2109 to 1.2273 before correcting slightly. GBPEUR followed the same trajectory, rising from 1.0937 to 1.1059. With no significant UK data the Jackson Hole Symposium will take the focus today and the G7 conference starts on Saturday.
The Dollar is broadly higher today in what is generally a quiet morning as markets await Fed Chair Powell’s speech later in the day.
Powell is under intense political pressure from the White House to aggressively cut interest rates and President Trump has called for full percentage point cut, to prevent an economic slowdown that has largely resulted from Washington’s own trade policy and the effects of its tax cuts.
However, the ongoing strength from a number of strong reports from U.S. retailers in recent weeks has so far stopped Fed officials from aggressively easing its monetary policy. Kansas City Fed President Esther George, repeated her opposition to any more easing on Thursday, as did Philadelphia Fed President Patrick Harker.
The Euro failed to close above 1.11 for the fourth straight day against the Dollar yesterday and is currently probing a downside break of the five day trading range of 1.1115 to 1.1060 and as of writing, the pair is currently trading at 1.1070.
The financial markets are priced for a 25 basis point rate cut in September for the Fed and at the same time, anticipating the European Central Bank (ECB) delivering a massive stimulus next month. So far, the dovish ECB expectations have overshadowed the dovish Fed expectations, evidently shown by their reluctance to signal further rate cuts and the drop of nearly 2% over the last 2.5 weeks. The backdrop could dramatically change if Powell bows to political pressure by using the Jackson Hole speech to set the stage for aggressive easing in the near term. In that case, range breakdown in EUR/USD, if any, could be short-lived.
The common currency, however, will likely end up falling below 1.10 if Powell refrains from signaling additional easing, forcing markets to price out prospects of a September rate cut.
Data to watch
15.00 USD – Fed Chair Powell Speaks