Euro Sell-off Pauses on German Stimulus Hopes
What’s been happening?
Pound Sterling – UK Markets
The British pound failed to build on last week’s gains and closed the day lower against both the dollar and the euro as investors shifted their attention to Brexit and headlines and started to price the potential impact of a no-deal exit on the economy. In an interview with Central Banking magazine, Bank of England (BOE) Governor Carney dismissed the idea of negative interest rates. “At this stage, we do not see negative rates as an option in the UK,” Carney said and repeated that he was not a big fan of changing the two percent inflation target.
Later in the day, British Prime Minister Boris Johnson’s spokesman told reporters that there won’t be a formal negotiation with the European Union until they drop the backstop. “There is still more work to do to prepare for Brexit, efforts have been significantly stepped up," the spokesman explained. Additionally, PM Johnson on Monday reiterated that they will be leaving the EU on October 31 with or without a deal. "We are very confident that by October 31 we will be ready for Brexit," Johnson added. "There will be bumps on the road but we can get ready." Later this week, PM Johnson will be meeting with Germany’s Merkel and France’s Macron.
US Dollar – US Markets
During an interview with Fox Business on Monday, US Commerce Secretary Wilbur Ross announced that the Trump administration decided to delay the Ban on Huawei to buy supplies from US companies for 90 days but added that the government added 46 additional Huawei subsidiaries to the entity list. With the market sentiment turning positive on this development, the 10-year US Treasury bond yield rose as much as 5% and helped the dollar gather strength against its rivals. The US Dollar Index, which gained 1.2% last week, edged higher on Monday.
Later in the evening, Boston Fed President told Bloomberg news that the US economic conditions were still pretty good and stated that he did not see a lot of need to take action on the monetary policy at this point. “The cure for global weaknesses should not rest solely on the United States easing policy,” Rosengren argued and also acknowledged the yield curve as an important signal but noted that it was reflecting the global weakness. "The lower interest rates are, the more you're encouraging people to take on more debt,” he further noted and questioned if they were in the right stage in the cycle to encourage people to be taking on more debt.
Euro – European Markets
The shared currency posted small gains vs. the pound sterling and finished the day virtually unchanged against the dollar as hopes of Germany introducing financial stimulus measures. According to the data published by the Eurostat on Monday, inflation in the eurozone, as measured by the Consumer Price Index (CPI) fell to 1% on a yearly basis in July from 1.3% in June and fell short of the market expectation of 1.1%. On a monthly basis, inflation declined by 0.5% in the same period. The core CPI, which excludes volatile food and energy prices, came in at -0.6% and 0.9% on a monthly and yearly basis, respectively. Other data released by the European Central Bank revealed that the current account surplus of the eurozone fell to €18.4 billion (seasonally adjusted) from €30.2 billion in June.
Several news outlets on Monday reported that Germany was preparing to introduce fiscal stimulus measures as a contingency in the event of a crisis with the main trigger for further stimulus being risks to the job market. While speaking to reporters, Germany’s Finance Minister Olaf Scholz commented on stimulus hopes. “If we have a debt level in Germany in relation to economic output that is below 60 percent, then this is the strength we have to counter a crisis with full force,” Scholz said and reiterated that the biggest problem that they were facing was the uncertainty caused by the US-China trade dispute. Earlier in the day, Germany’s Bundesbank in its monthly report said the economic performance was expected to decline further citing a serious downturn in the manufacturing industry. "While domestic consumption continues to isolate the economy, the jobs market is already showing signs of weakness and confidence in the services sector is also dropping," Bundesbank said.
What’s coming up?
UK: The Confederation of British Industry (CBI) will release its Industrial Trends Survey (orders) on Tuesday.
US: There won’t be any macroeconomic data releases from the US. Later in the day, Head of Supervision at the Federal Reserve (Fed), Randy Quarles, will be delivering a speech.
EU: The Producer Price Index (PPI) data from Germany and the eurozone construction output figures will be featured in the European economic docket on Tuesday.