Markets Gear Up For The Biggest Week of 2019

The dollar firms after upbeat GDP data, ahead of the biggest week of the year so far with the Fed set to cut rates for the first time in a decade.

Previous Day's Market Highlights

The dollar firmed to its best levels in almost 2 months on Friday after GDP data showed growth cooling by less than expected. The US economy expanded at 2.1% on an annualised quarter-on-quarter basis in the second quarter, significantly above the consensus estimate of 1.8%, but well below Q1's 3.1% pace. Economic growth was once again underpinned by resilient consumer spending, with personal consumption expenditures increasing by 4.3%, the fastest pace in 2 years, while government expenditures also supported growth, increasing by 5% in Q2, the fastest pace since the second quarter of 2009. However, not all components of the release were positive, with the impacts of ongoing US-China trade tensions significantly denting both business investment and exports. Investment fell by 0.6% over the quarter, the first decline in 3 years, while exports shrank by over 5%, resulting in trade as a whole subtracting 0.65% from GDP. Soft business investment, largely caused by increasing global risks and US-China trade tensions are of particular concern, with consumer spending unlikely to continue growing at a rate of more than 4%, raising some worries over growth in the coming quarters. The dollar however shrugged off these fears, extending its recent rally against a basket of peers by adding just over 0.2%. 

Elsewhere, the stronger dollar and ongoing concerns over the political landscape continue to dent the attraction of the pound. Sterling shed 0.65% against the dollar on Friday, falling to fresh year-to-date lows with markets remaining concerned by PM Johnson's 'do or die' Brexit plans. Against the euro, sterling traded 0.5% lower,
recording a 12th straight weekly decline. Meanwhile, the common currency also struggled against a stronger dollar, losing 0.2%, as markets continued to digest the Thursday's dovish ECB's policy message. In contrast, the Canadian dollar closed unchanged, with the loonie finding support as oil prices continued to firm. Friday's, and the week's, worst performers were the Aussie and Kiwi dollars, with both shedding nearly 2% over the past 7 days, as market participants mull the prospects of further monetary policy easing from both antipodean central banks. 

Away from FX, equity markets on both sides of the Atlantic concluded the week with solid gains after the upbeat US GDP report. The pan-European Stoxx 600 closed 0.3% higher, while the US benchmark S&P 500 added 0.75% to closed at a fresh record high. Finally, oil prices continued to strike a firm tone, with ongoing tensions in the Middle East helping to support prices. Both benchmark Brent and US WTI crude settled around 0.3% higher.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1115 1.1246 1.1048 1.76%
GBP/USD 1.2365 1.2705 1.2362 2.70%
EUR/USD 1.1125 1.1371 1.1100 2.38%
GBP/AUD 1.7900 1.8172 1.7630 2.98%
GBP/NZD 1.8650 1.8960 1.8368 3.12%
GBP/CAD 1.6290 1.6642 1.6145 2.99%

Today's Market Highlights

The biggest week of 2019 so far for financial markets begins with a barren data calendar. Today's only notable release will be July's manufacturing index from the Dallas Fed, set to show conditions modestly improving this month, with the index set to read -5.1. However, of more interest to market participants today will be the latest round of face to face US-China trade talks in Shanghai, likely to be a key driver of risk sentiment over the early part of the week.

Looking ahead to the remainder of the week, the biggest event, by far, will be Wednesday's Federal Reserve monetary policy decision, where the FOMC are set to announce a 25bps rate cut - the first rate reduction in more than a decade. Cutting rates would complete the Fed's shift from 'data dependence' to data independence, with incoming economic data giving policymakers little, if any, reason to contemplate loosening monetary policy. Instead, expect Fed Chair Powell to frame the rate cut as delivering an 'ounce of prevention' to protect the US economy against 'crosscurrents', namely ongoing trade tensions, that may negatively impact the current economic expansion. With a 25bps rate cut fully priced in, market participants will be focused on what comes next from the Fed - whether this is a one-off 'insurance' rate cut, or the beginning of a prolonged easing cycle. My current base case is for a 25bps rate cut in July and September, before policy is left on hold, however markets currently price in 75bps of policy easing by year-end. Key for the dollar will be the Fed's degree of dovishness, with a dovish policy message, implying further cuts this year, likely to weaken the greenback.

Also due this week are policy decisions from the Bank of Japan (BoJ) on Tuesday, and the Bank of England (BoE) on Thursday. Neither is expected to alter monetary policy settings, however both central banks are likely to strike a more cautious tone in light of increasing geopolitical risk and continued signs of a slowdown in the global economy. The BoE may also downwardly revise their growth forecasts, with concerns over Brexit continuing to dent business investment and economic activity in the UK.

Turning to economic data, this week's highlight will be Friday's US labour market report. Data is expected to show payrolls growth moderating in July, to around 170,000, however the jobs market should remain tight with unemployment close to record lows and wages set to continue increasing at a healthy pace. Elsewhere, the first estimate of 2nd quarter eurozone GDP will be closely examined for signs of continued weak economic momentum, while inflation reports in the shape of US Core PCE and eurozone CPI are both likely to show the pace of price increases remaining relatively benign. Both eurozone data points should serve to solidify the already strong case for the ECB to deliver a significant stimulus package in September. Finally, July's manufacturing PMI figures will be on the radar as a useful leading indicator of economic activity as the industry continues to struggle across the globe.

Today's Economic Calendar

Time Currency Release Consensus Previous
3:30pm USD Dallas Fed Manufacturing Index (Jul) -5.1 -12.1
3:00am (Tues) JPY BoJ Rate Decision -0.1% -0.1%