Powell Goes Tightrope Walking

Sterling rallies as the Brexit mood softens while ECB minutes point to September stimulus; ahead of Powell’s key speech at the Jackson Hole Symposium

Previous Day's Market Highlights

Another day, another set of Brexit headlines driving the pound was the theme on Thursday, as the mood between the UK and EU seemed to improve as PM Johnson concluded his mini-tour of European capitals. Johnson's talks with French President Macron resulted in little concrete headway, though Macron echoed German Chancellor Merkel's comments yesterday that the UK should provide alternatives to the Irish backstop within a month - perhaps evidencing the EU's willingness to look at alternatives. Meanwhile, Merkel was also on the wires, somewhat playing down the importance of the 30-day deadline, stating that a solution can be found by 31st October, while also nudging open the door to alternatives, mentioning that the UK and EU can work together to find a regime which keeps the Single Market intact and protects the Good Friday Agreement. Markets were buoyed by the conciliatory tone struck by both leaders, with sterling adding more than 1%, hitting month-to-date highs against both the euro and dollar, chalking up its biggest one-day gain against the former in 5 months. Whether the market is getting ahead of itself in pricing out some degree of no-deal risk or not remains to be seen, however it remains evident that market participants are primed to seize on any good news.
Meanwhile, in the eurozone, even small wins were being celebrated, with market participants relieved that August's flash PMI surveys didn't show a further slide into contractionary territory. However, economic momentum remains fragile, especially in the manufacturing sector, where the PMI rallied to a 2-month high of 47.0, though recorded a 7th consecutive monthly contraction. Providing further relief was the services sector, where the PMI increased to 53.4, allaying some concerns of the slowdown spreading into other areas of the economy. Nonetheless, the surveys shouldn't be seen as 'green shoots' and are unlikely to spell the start of a recovery in eurozone economic fortunes. Hence, a September ECB stimulus package remains likely, a fact flagged by dovish-sounding minutes. The account of July's meeting showed policymakers expressed concern over the decline in inflation expectations, while also flagging that downside risks facing the economy have become more pervasive. The minutes did little to alter the ECB's likely next policy move, with the September meeting set to see a combination of a deposit rate cut, a tiering system and possibly a resumption of asset purchases. The euro was unable to hold onto its post-PMI gains, ending the day unchanged, possibly weighed down by reports that German fiscal stimulus may not be forthcoming.
Elsewhere, the greenback struggled to gain ground, despite hawkish comments from a number of FOMC speakers as nerves over the economy persisted and markets remained nervous ahead of Fed Chair Powell's speech this afternoon. Comments from the FOMC's George, Kaplan and Harker were both on the hawkish end of the spectrum, with both policymakers indicating that they would not be looking to loosen policy further. Meanwhile, concerns over a potential recession rose to the fore once again after the spread between 2-year and 10-year Treasuries, a typically reliable indicator, inverted for the third time in a week. The dollar ended the day 0.1% lower against a basket of peers.
Away from FX, equity markets on both sides of the Atlantic closed in the red with market participants apprehensive ahead of Powell's speech this afternoon. The pan-European Stoxx 600 closed 0.4% lower, while the US benchmark S&P 500 shed 0.05%. Finally, in oil markets, both Brent and WTI were largely unchanged.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1030 1.1246 1.0724 4.64%
GBP/USD 1.2210 1.2383 1.2015 2.97%
EUR/USD 1.1070 1.1250 1.1026 1.99%
GBP/AUD 1.8080 1.8206 1.7560 3.55%
GBP/NZD 1.9115 1.9265 1.8278 5.12%
GBP/CAD 1.6260 1.6311 1.5865 2.73%

Today's Market Highlights

It's not easy being Jerome Powell. Not only does the Fed Chair have to face almost daily attacks from President Trump, but today Powell will have to walk a tightrope between a market crying out for rate cuts, and an economy which seems to warrant little in the way of further policy accommodation. Powell's keynote speech at the Jackson Hole Symposium, due at 3pm London time, will be extremely closely watched for clues on the monetary policy outlook, with the address an opportunity for Powell to reset market expectations. The Fed Chair will likely keep his options open, emphasising flexibility in the Fed's approach to monetary policy while possibly rowing back on the description of July's rate cut as a 'mid-cycle adjustment' - opening the door to further loosening; an action which would weaken the dollar. On the other hand, with the FOMC divided over the prospect of further rate cuts, Powell could easily disappoint those expecting dovish remarks, resulting in a significant repricing. It should however be noted that Powell seems to think he's a better communicator than he is, meaning that the intended meaning of his messaging can be easily lost and result in a volatile market reaction. While Powell is headlining the Symposium, a host of other FOMC speakers are due throughout the day including Bullard (voter, dove), Kaplan (non-voter, centrist), Mester (non-voter, hawkish) and Harker (non-voter, centrist). Comments from other FOMC members will be closely watched, but will likely have little immediate impact on price action. BoE Governor Carney will also be speaking at the Symposium after the European close.

With all eyes on Powell, economic data is likely to take a backseat, with only Canadian retail sales of any interest. Markets expect sales to have fallen by 0.1% MoM in June, repeating the fall seen in May and potentially raising concerns over the health of the Canadian consumer. While BoC rate cuts seem a long-shot at present, a soft release would likely result in a weaker loonie. Meanwhile, Brexit will continue to dominate for the pound, with this weekend's G7 summit giving PM Johnson a further chance to meet EU leaders for discussions. The results of such meetings result in the chance of volatile trading at Sunday's market open.
Looking ahead to next week, the data calendar is relatively barren as August draws to a close. No major central bank rate decisions are due, with the only notable releases coming on Friday in the shape of eurozone CPI and US core PCE inflation figures - with the pace of price increases set to remain benign in both regions.

Today's Economic Calendar

Time Currency Release Consensus Previous
13:30 CAD Canada Retail Sales (MoM - Jun) -0.1% -0.1%
13:30 CAD Canada Retail Sales ex. Autos (MoM - Jun) 0.0% -0.3%
15:00 USD Fed Chair Powell Speech