July was just an insurance cut

The dollar strengthens as FOMC minutes show July's cut as an insurance measure, but Powell's Friday speech is the main focus

Previous Day's Market Highlights

US monetary policy remains one of the main focuses for market participants, though minutes from the FOMC's July meeting gave little by way of hints as to future policy action. While most officials fell in line with Chair Powell's view that July's 25bps cut was a 'mid-cycle adjustment', a couple of members would have preferred to immediately cut rates by 50bps; an action that may have resulted in market panic. With most FOMC members seeing July's cut as an insurance cut, it may be difficult to obtain a majority on the committee for further policy loosening should risks to the economy persist. On trade, which seems to be the main determinant of US monetary policy at present, officials flagged elevated levels of uncertainty - though it should be noted that the minutes are 3 weeks out of date and do not take into account recent developments. It is clear that US-China relations will continue to drive Fed policy, with the Fed seemingly in danger of underwriting President Trump's trade war should policy loosening continue. For the dollar, the slightly less-dovish than expected minutes resulted in a brief pop higher, with the greenback then paring some of its gains to close 0.15% higher against a basket of peers. With the minutes being slightly stale, Friday's speech from Fed Chair Powell will likely be of more importance.


Meanwhile, Brexit headlines continue to dominate for the pound, with lingering concerns over a no-deal exit exerting pressure. Such concerns were fuelled further by comments from French officials stating that a no-deal exit is now the 'central scenario', however this seems to be little more than political posturing ahead of Prime Minister Johnson's meeting with President Macron today. The PM began his mini-tour of European capitals in Berlin, where German Chancellor Merkel struck a relatively conciliatory tone, stating that an alternative to the Irish backstop may be possible 'within 30 days'. Merkel's challenge, with UK officials needing to come up with an alternative, had little impact on markets, with the pound shedding around 0.3% against both the dollar and euro.

Elsewhere, the euro largely trod water ahead of a busy economic calendar today, while the Canadian dollar gained ground after hotter than expected inflation figures. Data showed CPI increased at 2.0% YoY in July, above expectations and in line with the Bank of Canada's (BoC) target level. The report shows inflationary pressures persisting in the Canadian economy, fuelled by a tight labour market, reducing the chances of a September BoC rate cut. The loonie ended Wednesday around 0.2% higher. 

Away from FX, equity markets on both sides of the Atlantic gained ground. In Europe, the pan-continental Stoxx 600 added more than 1.1%, while the US benchmark S&P 500 closed 0.8% higher, aided by upbeat earnings announcements in the retail sector. Finally, oil prices were mixed, with an unexpected rise in gasoline inventories weighing on US crude. Global benchmark Brent settled 0.45% higher, while US WTI shed 0.8%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.0940 1.1246 1.0724 4.64%
GBP/USD 1.2120 1.2383 1.2015 2.97%
EUR/USD 1.1075 1.1250 1.1026 1.99%
GBP/AUD 1.7910 1.8206 1.7560 3.55%
GBP/NZD 1.8990 1.9061 1.8278 4.11%
GBP/CAD 1.6135 1.6230 1.5865 2.25%

Today's Market Highlights

Focus falls on the eurozone today, with a couple of major releases due. Firstly, this morning's flash August PMI figures are set to show momentum across the bloc remaining weak, with the slowdown set to broaden. Data is likely to show manufacturing PMI printing 46.2 this month, which would represent a 7th consecutive contraction and the lowest level in more than 6 years. More worryingly, the services sector is also set to slow, with the PMI expected at 53.0, possibly showing signs of the slowdown spreading into the non-manufacturing sector; a concern with services having underpinned almost all of the eurozone's economy growth this year. 

The continued slowdown is almost certain to result in an ECB stimulus package being announced in September, with market participants set to look for hints of what this package may contain when minutes from the July policy meeting are released this lunchtime. Focus will likely fall on comments surrounding the possibility of strengthening forward guidance, tiering the negative deposit rate and restarting asset purchases; all areas the ECB tasked committees to investigate last time around. Furthermore, as with other global central banks, comments on the global economic backdrop, and US-China trade relations will also be closely watched. The final data point from the eurozone will be this afternoon's consumer confidence figures, expected to remain rooted firmly in pessimistic territory. 

Meanwhile, the near-term direction of the pound will likely hinge on the outcome of today's meeting between PM Johnson and French President Macron, with both maintaining a hard stance on Brexit. Johnson is likely to reiterate his Brexit stance of abolishing the backstop and leaving on the 31st October with or without a deal, however will likely receive a frosty reception after the French President described Johnson's terms as 'not workable'. Any negative headlines that show a no-deal exit inching closer will likely weigh on the pound. 

Across the pond, while weekly jobless claims and manufacturing figures from the Kansas Fed may attract some attention, all eyes will be on the annual Jackson Hole Symposium, which kicks off this afternoon. The Symposium, essentially a gathering of global central bankers, has previously been used by policymakers to announce significant shifts in monetary policy. Markets will be primarily focused on Friday's keynote speech from Fed Chair Powell, though comments from several other policymakers over the next 3 days will all be potential sources of volatility.

Today's Economic Calendar

Time Currency Release Consensus Previous
09:00 EUR Flash Manufacturing PMI (Aug) 46.2 46.5
09:00 EUR Flash Services PMI (Aug) 53.0 53.2
09:00 EUR Flash Composite PMI (Aug) 51.2 51.5
12:30 EUR ECB Meeting Minutes
13:30 USD Weekly Jobless Claims (Aug 16) 215k 220k
15:00 EUR Prelim. Consumer Confidence (Aug) -7.0 -6.6