Dollar Rises Modestly on FOMC Minutes
What’s been happening?
Pound Sterling – UK Markets
The British pound posted losses against its rivals on Wednesday as markets continue to asses the latest headlines surrounding Brexit.
Contradicting with German Chancellor Angela Merkel’s comments about the EU’s willingness to find a practical solution to the backstop issue, German President Frank-Walter Steinmeier said that it was unlikely that the negotiations on the backstop would get going again. Echoing the same sentiment, Finance Minister Scholz that no one should expect any changes to the Brexit deal. Earlier in the day, Irish Foreign Minister Coveney argued that the UK with its stance was making a no-deal Brexit far more likely.
Speaking to reporters ahead of her meeting with British Prime Minister Boris Johnson, Merkel said that she would welcome a negotiated Brexit deal. “Our goal is to continue having tight relations with Britain after the Brexit. European offer stands to negotiate a trade deal after Brexit," Merkel added. On the other hand, PM Johnson said that it was clear that the could not accept the Withdrawal Agreement as it stands. "If we can remove the backstop we can move forward together," Johnson repeated.
Meanwhile, the data published by the UK’s Office for National Statistics (ONS) showed the public sector’s net borrowing fell £1.9 billion in July after rising £5.6 billion in June.
US Dollar – US Markets
The US Dollar Index stayed relatively calm for the majority of the day but gained traction and erased most of Tuesday’s fall. In an op-ed article published in the Financial Times on Wednesday, Minneapolis Fed President Neel Kashkari said that he will argue for the Federal Reserve to cut its policy rate. "We should also use forward guidance to provide even more of a boost to the economy than a rate cut alone can deliver," Kashkari wrote but these comments had little to no impact on the dollar’s market value as investors refrained from making large bets while waiting for the FOMC to publish the minutes of it’s July 30-31 meeting. The only data from the US revealed that existing home sales increased by 2.5% on a monthly basis in July as expected.
The FOMC said that a couple of policymakers favoured a 50 basis point rate cut rather than a 25 basis point one to address the low inflation. "Most policymakers viewed a 25 basis point cut as part of a recalibration of policy stance, or mid-cycle adjustment, in response to recent changes in the economic outlook," the FOMC added. The fact that the FOMC didn’t offer any fresh insights into the Fed’s next policy move and echoed Chairman Jerome Powell’s cautious tone helped the dollar gather strength.
Euro – European Markets
The shared currency extended its recovery against the dollar on Wednesday despite a lack of macroeconomic data releases from the euro area but lost its strength in the second half of the day and closed lower. German Finance Minister Scholz on Wednesday said that they were currently practising an expansive budget policy to revive hopes of the German government introducing more stimulus to battle a possible recession and helped the euro gather strength. Commenting on the political turmoil in Italy, Scholz said there was no sign of a euro crisis due to Italy’s political upheaval.
What’s coming up?
UK: The Confederation of British Industry will release its Distributive Trades Survey on Thursday.
US: Weekly jobless claims, Kansas Fed Manufacturing Index, and the IHS Markit Manufacturing and Services PMI reports will be featured in the US economic docket.
EU: The IHS Markit will release the Manufacturing and Services PMI for the eurozone, Germany, and France on Thursday. Although a negative reading from Germany could be disappointing, it could cause markets to start pricing the German stimulus.