Dollar Erases NFP-Inspired Gains After Powell's Remarks
What’s been happening?
Pound Sterling – UK Markets
The British pound recorded strong recovery gains against the dollar. However, the fact that the currency struggled to outperform the euro suggested that this rebound was the product of dollar weakness. The UK’s Office for National Statistics on Wednesday reported that manufacturing production and industrial production both expanded by 1.4% on a monthly basis in May after contracting in April. Other data revealed that the trade deficit narrowed to £2.342 billion from £-3.716 billion. Finally, the economy expanded by 0.3% on a monthly basis in May following April’s 0.4% contraction.
In its latest GDP Tracker report, the National Institue of Economic and Social Research (NIESR) said that the UK economy is on course to contract by 0.1% in the second quarter of 2019. “Two-quarters of contraction would mean that the economy is in a technical recession, but the initial outlook for the third quarter of 2019 is for growth of 0.2%. If correct, that would still imply that the economy has lost a significant moment since the first quarter,” the NIESR explained. Commenting on the economy losing momentum, “This reflects the impact of Brexit-related uncertainty and slower growth in the global economy outside of the United States,” said Janine Boshoff, Economist in the Macroeconomic Modelling and Forecasting team of the NIESR. “The near-term outlook for the UK economy continues to depend on the outcome of the Brexit negotiations.”
Later in the day, while speaking at an event in London, Bank of England MPC member Silvana Tenreyro argued that the Bank of England was in no rush to raise the policy rate if they were to leave the EU with a deal. "Coupled with signs of a weaker global outlook, recent developments likely lengthen the period until there is a sufficient pick-up in inflationary pressures for me to vote to raise Bank Rate," Tenreyro said, per Reuters.
US Dollar – US Markets
The dollar came under heavy selling pressure after the Fed published the prepared statement of Chairman Powell to be delivered at his semi-annual testimony to the Congress. The US Dollar Index erased the majority of the gains that it posted since last Friday’s upbeat employment data. "It appears trade uncertainties and concerns about global economy continue to weigh on U.S. economic outlook," Powell said and added that weak inflation could be even more persistent than the Fed anticipates. Powell further reiterated that the Fed will act 'as appropriate' to sustain the U.S. economic growth.
Later in the day, the FOMC’s June meeting minutes revealed that a couple of participants favoured a rate cut at the meeting and many officials saw a stronger case for a rate cut amid rising risks. "Members noted that decisions regarding near-term adjustments of the stance of monetary policy would appropriately remain dependent on the implications of incoming information for the economic outlook," the FOMC said.
In the meantime, St. Louis Fed President Bullard, who back in late June said that a 50 basis points rate cut in July would be overdone, on Wednesday adopted a more dovish tone saying that he didn’t want to prejudge the Fed’s July decision. "Would like to take out some insurance against a sharper U.S. slowdown," Bullard added.
Euro – European Markets
The shared currency took advantage of the selling pressure surrounding the dollar and closed the day higher while staying relatively calm vs the pound sterling. The only data from the euro area on Wednesday showed that industrial output in Italy contracted by 0.7% on a yearly basis in May.
What’s coming up?
UK: The Bank of England is scheduled to publish its Financial Stability Report on Thursday.
US: The U.S. economic docket will feature the weekly jobless claims, and Consumer Price Index data. FOMC Chairman Powell will respond to questions from members of the Congress on the second day of his testimony as well.
EU: The European Central Bank will release the minutes of its June meeting on Thursday.