Dovish Fed Commentary Drags USD Lower
What’s been happening?
Pound Sterling – UK Markets
The British pound recorded solid gains against both the dollar and the euro on Thursday supported by upbeat retail sales data and renewed hopes of the UK avoiding a no-deal Brexit.
The UK’s Office for National Statistics on Thursday reported that retail sales in June increased by 1% on a monthly basis following May’s decline of 0.6% and surpassed the market expectation for a contraction of 0.3%. “The year-on-year growth rate shows that the quantity bought in June 2019 increased by 3.8%, with growth across all sectors except department stores, while May 2019 was at 2.2% for the year-on-year growth rate,” the ONS noted in its publication.
Earlier in the day, UK Cabinet Office Minister David Lidington said that the EU had suggested putting Brexit 'on ice' for five years. Additionally, Irish Prime Minister (PM) Leo Varadkar stated that he could see a route to a resolution on the border issue adding that they have a few different options to avoid a hard border. Later in the day, while speaking to Reuters on the sidelines of the G7 finance ministers meeting in France, “I greatly fear the impact on our economy and our public finances of the kind of no-deal Brexit that is realistically being discussed now,” British Finance Minister Philip Hammond said.
US Dollar – US Markets
The US Dollar Index, which tracks the dollar’s value against a basket of six major currencies, came under strong selling pressure and erased all of the gains it posted on Monday and Tuesday. Although today’s data from the U.S. revealed that initial jobless claims came in at 216K to match the market expectation and the Philly Fed Manufacturing Index jumped to 21.8 in July from 0.3 in June to beat the market expectation of 5 by a wide margin, dovish Fed commentary weighed on the greenback.
Commenting on the policy outlook, NY Fed President Williams on Thursday argued that it was better to take preventative measures on rates than to wait for disaster to unfold. “Policymakers must move more quickly to vaccinate the economy and add monetary stimulus when rates are close to zero,” Williams added. “Lower-for-longer rates foster good financial conditions, allows stimulus to pick up steam, allows inflation to rise.” Furthermore, during an interview with Fox Business, Federal Reserve’s Vice-Chairman Clarida said that it was important to act ‘pre-emptively’ when rates near zero. Finally, St. Louis Fed President Bullard stated that a couple of rate cuts in 2019 could shift the yield curve upward.
Euro – European Markets
The shared currency outperformed the dollar but struggled to gather strength against the pound sterling on Thursday. There were no macroeconomic data releases from the euro area during the day. In the meantime, while speaking at an event earlier in the day, European Central Bank (ECB) Governing Council member Villeroy reiterated that the global economic slowdown was undeniable and the CEB was doing its job amid the slowdown. “Low rates could push credit up too much,” Villeroy argued.
What’s coming up?
UK: The UK’s Office for National Statistics will publish the Public Sector Borrowing data on Friday, which is likely to be ignored.
US: The U.S. economic docket will feature the University of Michigan’s Consumer Sentiment report, and a speech by the St. Louis Fed President Bullard.
EU: The European Central Bank will release the current account figures on Friday.