White House musical chairs tarnishes Dollar
Political fallout after the unrest in Charlottesville and the cabinet reshuffling last week instilled doubt in investors who priced in concerns that President Trump was able to impose his infrastructure plans and/or tax reforms (this year). This caused the Dollar to fall against its major peers and the Pound closed at 1.2874, whilst the Euro closed at 1.1765.
The latest University of Michigan consumer confidence index was firmer than expected, increasing to 97.6 for August from 93.4 previously. There was a strong advance in the expectations component which supported sentiment surrounding spending and eased potential concerns surrounding an underlying downturn.
It’s a light calendar week concerning data this week. Nonetheless, Fed Chair Yellen will speak at Jackson Hole on Friday. Yellen’s subject is “financial stability’’ but it’s not clear whether she’ll offer any surprises on the policy outlook. The FOMC is now widely expected to announce balance sheet unwinding next month.
Sterling faltered in the lack of eco data and one-year UK interest-rate swaps drifted lower. Market expectations of an increase in interest rates continued to fade despite mixed data releases during the week. Markets, overall, were still unable to find any convincing reasons to buy Sterling on fundamental grounds. The Pound was, again, unable to hold above 1.2900 against the Dollar while GBPEUR weakened to the 1.0953 area.
There was a further small increase in Sterling short positions, according to the latest commitment of traders (COT) data, to the highest level since late June which may curtail further selling pressure, although positioning is certainly not extreme with the number of shorts still substantially below the levels seen earlier in 2017. The Rightmove house-price index declined 0.9% on seasonal grounds as the year-on-year rate edged higher to 3.1% from 2.8%. There was little change on Monday with Sterling marginally stronger.
The European Central Bank (ECB) president Mario Draghi is returning from summer holidays this week and all eyes will be on his communication following strong economic data but also a significant Euro appreciation. The ECB President is set to be among the speakers at the annual central bank symposium at Jackson Hole, Wyoming, this week for the first time in three years. In 2014, he hinted at QE and now the focus is on tapering signals. We expect him to deliver a dovish message and to not give any new communication on the issue of tapering of asset purchases.
Meanwhile, the Euro remains under pressure in light of last week’s ECB minutes which showed that the members of the Council were worried over the exchange rate appreciation and felt that accommodation was needed in either direction.
In the absence of key catalysts, Euro investors will eye the German Buba monthly report and sentiment on the European markets for fresh impetus.
Data To Watch:
9:30am GBP Public Sector Net Borrowing (Jul)
1:30pm USD Chicago Fed National Activity Index (Jul)