Euro Rises Modestly as Risk Sentiment Drives Markets
What’s been happening?
Pound Sterling – UK Markets
The British pound failed to build on the gains it recorded vs the euro on Tuesday and fell to its worst level in nearly two years. Against the dollar, the currency stayed relative calm and finished the day virtually unchanged. The only data from the UK on Wednesday showed that the Halifax House Price Index declined by 0.2% on a monthly basis in July to miss the market expectation for an increase of 0.3% but was largely ignored by the market participants.
Following his meeting with the US President Trump and Vice President Mike Pence in Washington, British Foreign Secretary Dominic Raab said that they look forward to working with the US to reach a free trade deal that is good for both countries. “We appreciate the president’s warmth and enthusiasm for the UK-US relationship,” Raab told reporters. Earlier in the day, commenting on lawmakers’ desire to prevent a no-deal Brexit, “The most simple thing is the prime minister believes that politicians don’t get to choose which votes they respect, that is the critical issue,” British Prime Minister Boris Johnson’s senior adviser Dominic Cummings told Sky News.
US Dollar – US Markets
The dollar recovered some of the recent losses it suffered against its major rivals on Wednesday but struggled to gather momentum as falling US Treasury bond yields made it difficult for the currency to find demand. The only data from the US revealed that consumer credit increased by $14.6 billion on a monthly basis in June to fall short of the market expectation of $16 billion. "Consumer credit increased at a seasonally adjusted annual rate of 5 percent during the second quarter," the Federal Reserve noted in its press release.
The fact that the Reserve Bank of New Zealand, the Reserve Bank of India, and the Central Bank of Thailand has opted out for surprise rate cuts on Wednesday revealed the negative impact of the US-China trade war on the global economic outlook and forced investors to continue to seek refuge. With the demand for the safe-haven Treasury bonds rising sharply, the yield on the 10-year reference slumped to its lowest level since October 2016 with a daily loss of more than 6%.
Moreover, US President Trump, called upon the Fed to cut rates in series of tweets that read: “Our problem is a Federal Reserve that is too proud to admit their mistake of acting too fast and tightening too much (and that I was right!). They must cut rates bigger and faster, and stop their ridiculous quantitative tightening now.” Commenting on the policy outlook in his annual interview, Chicago Fed President Charles Evans argued that economic headwinds suggest that it would be reasonable to cut rates. "On the basis of low US inflation alone, the July interest rate cut was justified, and more policy accommodation needed," Evans told reporters. The CME Group’s FedWatch Tool on Wednesday showed that the probability of a 50 basis points rate cut in September rose to 35% from 15% on Tuesday.
Euro – European Markets
The data published by Germany’s Destatis on Wednesday showed that industrial production in Germany contracted by 1.5% on a monthly basis in June to miss the market expectation for a decline of 0.4%. Despite this disappointing data, the euro closed the day modestly higher against both the pound sterling and the dollar as it was able to find demand as a more stable alternative to those currencies.
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK on Thursday.
US: The weekly jobless claims and wholesale inventories data will be featured in the US economic docket.
EU: The European Central Bank will publish its monthly Economic Bulletin on Thursday.