Dollar Extends Rally Despite Fed's First Rate Cut Since 2008
What’s been happening?
Pound Sterling – UK Markets
After staging a decisive recovery against the dollar during the first half of the day, the British pound erased its gains following the FOMC Chairman Powell’s remarks and their positive impact on the dollar. On the other hand, the currency erased the losses it suffered vs the euro yesterday.
Northern Ireland’s Democratic Unionist Party (DUP) lawmaker Jeffrey Donaldson on Wednesday said British Prime Minister Boris Johnson was absolutely prepared to go through with a no-deal Brexit. Later in the day, "Johnson says backstop is dead so we need to find a new way forward," DUP leader Foster said. "There are ways to deal with border issue; Dublin must dial down the rhetoric."
The only data from the UK on Wednesday showed that Nationwide Housing Prices rose 0.3% on a monthly basis in July to beat the market expectation of 0.2%.
US Dollar – US Markets
The Automatic Data Processing’s (ADP) monthly report on Wednesday revealed that the private sector employment in July increased by 156,000 following June’s 112,000 reading and surpassed the market expectation of 150,000. Other data from the US showed that the Employment Cost Index in the second quarter ticked down to 0.6% and the ISM Chicago’s PMI slumped to 44.4 in July to miss the market expectation of 50.6 by a wide margin. Nevertheless, markets largely ignored these data releases while waiting for the FOMC to announce its interest rate decision and publish its policy statement.
Following its 2-day meeting, the Federal Open Market Committee announced that it lowered the benchmark interest rate by 25 basis points to the target range of 2% - 2.25% in a widely expected decision, citing implications of global developments for the US economic outlook and muted inflation pressures. "Vote in favour of the policy was 8:2, George and Rosengren dissented because they preferred to maintain the target rate at 2.25-2.50%," the FOMC noted in its statement. With the initial market reaction, the US Dollar Index climbed to its highest level in more than two years at 98.42.
During the press conference, Powell said the rate cut decision was not seen as the start of a long cutting cycle and explained that the rate cut had an “insurance and a risk management aspect” to it. Regarding the trade conflict, “the biggest effect of trade tensions, tariffs on the economy is through business confidence channel,” Powell argued. Although Powell noted that it was not likely for the Fed to return to rate hikes during this business cycle, he reiterated that the US economic outlook was a positive one.
Euro – European Markets
The euro fell to its worst level in more than two years against the dollar on Wednesday. According to Destatis, retail sales in Germany increased by 3.5% on a monthly basis in June but came in at -1.6% on a yearly basis. Other data from Germany showed the unemployment rate stayed unchanged at 5% in July. Later in the day, the Eurostat announced that the real GDP in the euro area expanded by 0.2% on a quarterly basis as expected. “Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.1% in the euro area and by 1.3% in the EU28 in the second quarter of 2019. In the previous quarter, GDP had grown by 1.2% in the euro area and by 1.6% in the EU28,” the Eurostat said.
Finally, the Eurostat reported that inflation, as measured by the core Consumer Price Index that strips volatile food and energy prices, edged down to 0.9% on a yearly basis in July to fall short of the market estimate of 1%.
What’s coming up?
UK: The IHS Markit will publish the final Manufacturing PMI on Thursday, which is expected to fall to 47.7 from 48. More importantly, the Bank of England is expected to keep its policy rate unchanged at 0.75% while holding the Asset Purchase Facility (APP) steady at £435 billion. Following the decision, BoE Governor Carney will deliver his prepared remarks on the policy outlook and respond to questions from the press.
US: Weekly jobless claims data and the IHS Markit and the ISM Manufacturing PMI reports will be featured in the US economic docket.
EU: The IHS Markit will release the Manufacturing PMI data for Germany, Italy, France, and the eurozone on Thursday.