How Much Easing?

The dollar recovers early losses after less-dovish Fed comments and hotter inflation figures leave markets grappling with the Fed’s policy path.

Previous Day's Market Highlights

The dollar pared earlier losses to close unchanged on Thursday as markets continued to gauge the likely extent of Federal Reserve policy easing. Fed Chair Powell used the second day of Congressional testimony to reiterate his dovish message, reaffirming the Fed’s desire to ‘act as appropriate’ in order to sustain the economic expansion. Other comments were broadly in line with Wednesday’s message, including that trade concerns continue to weigh on the economic outlook and that the Fed has signalled their openness to more accommodation. However, other FOMC members commenting on Thursday struck a less dovish tone, with non-voters Bostic and Barkin both stating they do not currently see inflation readings as a trigger for looser policy. Speaking of inflation, June’s CPI figures surprised to the upside. Headline CPI increased at 1.6% YoY as forecast, though increased at a better than expected 0.1% MoM. Meanwhile, the less-volatile core figure, which removes the effects of food and energy prices, increased at an above-forecast 2.1% YoY, with core inflation having tracked between 2% and 2.1% since February, broadly in line with the Fed’s target. The above-forecast core CPI figure has cast some doubt on the Fed entering a prolonged policy easing cycle. Combined, the less-dovish comments and hotter than expected inflation reading saw the dollar recover its losses, bouncing back from a 1-week low against a basket of peers. 

Monetary policy was also in focus from the eurozone, with minutes from the ECB’s June policy meeting reaffirming Draghi & Co.’s dovish stance. Policymakers stated their ‘determination to act’ to return inflation to target, while broadly agreeing that the ECB needed to be ready and prepared to further ease policy. Such comments are broadly in line with Draghi’s recent statements, and increase the likelihood of a change to forward guidance in July, followed by a 10bps-20bps deposit rate cut in September. The euro was pressured by the dovish remarks, closing unchanged against the dollar, while falling around 0.2% against the pound, the common currency’s first decline in 3 days. 

Elsewhere, other G10s were relatively subdued. Sterling closed around 0.2% higher against the dollar, paring earlier gains as the greenback strengthened throughout the afternoon session. Meanwhile, both the Aussie and Kiwi dollars gained ground as markets remained in risk-on mood.

Away from FX, the pan-European Stoxx 600 equity index shed 0.12%, continuing its recent decline. Across the pond, the US benchmark S&P 500 gained just under 0.25%. Finally, oil prices lost ground, with both Brent and WTI crude shedding around 0.5% as OPEC forecasts for slower demand exerted pressure. 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1130 1.1270 1.1092 1.58%
GBP/USD 1.2545 1.2784 1.2439 2.70%
EUR/USD 1.1270 1.1412 1.1181 2.02%
GBP/AUD 1.7920 1.8422 1.7852 3.09%
GBP/NZD 1.8765 1.9345 1.8674 3.47%
GBP/CAD 1.6340 1.6904 1.6326 3.42%

Today's Market Highlights

The week concludes with a relatively quiet economic calendar, likely resulting in market participants continuing to digest the prospect of looser Fed policy on the horizon.

In terms of data, today’s primary release will be May’s industrial production data from the eurozone. Production is set to increase by 0.2% on a month-on-month basis, which would represent the fastest pace in 5-months. However, on a year-on-year basis, data should be softer, with production set to decrease by 1.6%. With economic momentum remaining weak across the bloc, a softer than expected production figure would serve only to further increase the chances of the ECB providing additional stimulus. Today’s only other major release will be producer price inflation figures from the US. Data is expected to show PPI increasing at 1.6% YoY in June, the slowest pace since November 2016. A benign PPI reading may feed into softer consumer price inflation in the coming months, further clouding the Fed’s policy picture. 

A couple of central bank speakers are also due today. Markets will hear from typically hawkish BoE MPC member Vlieghe this morning, where any comments on the policy outlook in light of ongoing Brexit-related uncertainties will be closely watched. This afternoon, Fed voter Evans’ remarks will be examined as markets continue to assess the extent of the Fed’s policy easing. 

Looking ahead to next week, the calendar is busy, with focus turning back to economic data releases. Of most interest will likely be inflation data from the UK, eurozone, Canada and New Zealand as markets continue to grapple with global central banks’ shift to a more dovish policy stance. Other highlights include labour market data from the UK and Australia, in addition to the US consumer being in focus with retail sales and sentiment figures scheduled.

Today's Economic Calendar

Time Currency Release Consensus Previous
10:00am EUR Industrial Production (MoM - May) 0.2% -0.5%
10:00am EUR Industrial Production (YoY - May) -1.6% -0.4%
1:30pm USD PPI (YoY - Jun) 1.6% 1.8%
1:30pm USD Core PPI (YoY - Jun) 2.2% 2.3%