Acting as Appropriate

The dollar struggles after Fed Chair Powell gives a nod to looser monetary policy ahead of today’s busy economic calendar.

Previous Day's Market Highlights

The dollar declined on Tuesday as markets continued to increase bets on the Federal Reserve cutting interest rates this year after Fed Chair Powell gave a nod to more accommodative policy in his speech at a Fed Listens event. Powell stated that the Fed would “act as appropriate” to sustain the expansion, and that they are “closely monitoring” the impact of developments in US-China trade. Markets, which were already concerned that tariff increases may tip the US into an economic slowdown, took the comments as Powell shifting to a slightly more dovish policy stance. Accordingly, futures contracts now price a 62% chance of a rate cut in July, up almost 5% from before Powell spoke. A 25bps rate cut by the end of the year is now almost a certainty according to markets - a 97.4% chance. Also weighing on the dollar was weak factory orders data, with figures showing orders declining at their fastest pace since October 2018 in April. Over the course of the day, the dollar fell 0.2% against a basket of peers, ending the day at a 2-month low. 
Elsewhere, the pound remained relatively resilient despite disappointing construction PMI figures which showed contraction in the sector for the 3rd month in 4. Markets however largely shrugged off the release, continuing to focus on the political bubble, where a Conservative Party rule change should ensure the field of leadership candidates is whittled down quickly. A new Prime Minister should be installed by the week beginning 22 July. Sterling ended the day with a 3rd consecutive daily gain against the dollar, adding 0.2%, and recorded its 1st gain in 4 days against the euro, adding 0.3% to recover after earlier hitting a 5-month low. 
Meanwhile, the euro struggled, failing to take advantage of a weaker dollar, after disappointing inflation data looks set to provide a headache for the ECB ahead of Thursday’s policy decision. Data showed headline CPI increasing at just 1.2% (y/y) in May, the slowest increase since April 2018. Core CPI was also sluggish, increasing at just 0.8% on a year-on-year basis as the effects of Easter seasonality fade. The dip in inflation comes despite tightening labour conditions, with the unemployment rate falling to 7.6% - a near 11-year low. 
Overnight, GDP data from Australia showed a miserable first quarter, with growth of just 0.4% on a quarter-on-quarter basis. Though this figure was below market expectations, a loosening of monetary policy since the data was gathered along with a broadly softer dollar have kept the market reaction relatively muted. The major mover overnight has been the kiwi dollar, with the NZD adding over 0.5% after hawkish comments from RBNZ Assistant Governor Hawkesby that rates will remain close to current levels for some time. 

Away from FX, US equity markets experienced their biggest 1-day gains in over 5 months after hints of accommodative monetary policy from Fed Chair Powell, with the benchmark S&P 500 adding 2.14%. European equity markets were more muted, with the Stoxx 600 adding 0.6%. Finally, oil prices remained pressured by demand fears stemming from US-China trade tensions, both Brent and WTI shed 0.3%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1280 1.1632 1.1232 3.44%
GBP/USD 1.2700 1.3041 1.2558 3.70%
EUR/USD 1.1260 1.1277 1.1107 1.51%
GBP/AUD 1.8145 1.8716 1.8117 3.20%
GBP/NZD 1.9125 1.9799 1.9114 3.46%
GBP/CAD 1.6990 1.7519 1.6902 3.52%

Today's Market Highlights

Today’s primary data releases will be services PMI figures, with data due from the eurozone, UK and US throughout the day. From the eurozone, markets expect final figures for May to remain unchanged from the previously released flash estimate, pointing to expansion with the index at 52.5, a modest dip from April. However, such a reading would once again show how economic growth in the euro-area is underpinned by the services sector, despite a sluggish manufacturing industry. Meanwhile, from the UK, services PMI is expected at 50.6, a modest uptick from April’s index. However, markets will be focusing on whether the sector, which comprises approximately 80% of UK economic output, will remain in expansionary territory despite contraction in manufacturing and construction. The final PMI release is due from the US, with ISM non-manufacturing PMI expected to remain unchanged from April at 55.5 - a solid expansionary pace. 
Away from PMI surveys, markets will have plenty of other data releases to chew over. From the eurozone, this morning’s producer price inflation and retail sales figures will be on market participants’ radar - the latter of greater importance. Sales, on both a month-on-month and year-on-year basis, are expected to fall to their lowest level since December 2018, with an increase of just 1.5% expected compared to April last year. From the US, markets will look over this afternoon’s ADP employment change figures, expected at 183k, as a guide to Friday’s official labour market data - though the correlation between the two remains doubtful at best. 
Turning to central banking and markets have several speeches and releases to look out for. This morning, investors will look to a speech from BoE Deputy Governor Ramsden for clues about the monetary policy outlook post-Brexit, with the typically dovish Ramsden an outsider in the race to replace Governor Carney. This afternoon, from the Fed, markets will look to speeches from Vice Chair Clarida, Board Member Bowman and non-voter Bostic for signs that other policymakers are shifting towards a more dovish stance after Powell’s comments yesterday. The Fed’s Beige Book - anecdotal commentary on regional economic conditions - will also be released this evening.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:00am EUR Services PMI (Final - May) 52.5 52.5
9:30am GBP Services PMI (May) 50.6 50.4
10:00am EUR Retail Sales (y/y - Apr) 1.5% 1.9%
1:15pm USD ADP Employment Change 183k 275k
3:00pm USD ISM Non-Manufacturing PMI (May) 55.5 55.5