Trump verbally pressuring FED
What’s been happening?
Pound Sterling – UK Markets
The British pound posted modest gains against both the dollar and the euro on Tuesday supported by the upbeat tone in the labour market data and cautiously hawkish BoE commentary. The UK’s Office for National Statistics today reported that the unemployment rate remained unchanged at 3.8% in April with the claimant count change rising 23,200 following April’s reading of 19,100 and coming in slightly worse than the market expectation of 22,900. Regarding the wage inflation, “Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.1%, before adjusting for inflation, and by 1.2%, after adjusting for inflation, compared with a year earlier,” the ONS said. Commenting on the labour market, Bank of England’s MPC member Vlieghe argued that the unemployment rate still matters even if under-employment is one of the reasons why wage growth has been so weak.
Later in the day, another BoE MPC member, Michael Saunders, reiterated that the UK could see more rate hikes in case of a smooth Brexit. Commenting further on the policy outlook, Saunders explained that the BOE could cut rates close to zero if needed but would not go to negative rates and added expanding QE asset purchases could also be considered. Finally, “I don't feel confident about saying what direction interest rates would need to go after no-deal Brexit,” BoE Deputy Governor said.
US Dollar – US Markets
The US Dollar Index struggled to extend its recovery on Tuesday and finished the day virtually unchanged. According to the U.S. Bureau of Labor Statistics, the Producer Price Index in May rose 0.1% to bring the annual rate down to 1.8% from 2.2% compared to analysts’ estimate of 2%. The core PPI, which strips the volatile food and energy prices, ticked down to 2.3% on a yearly basis. Other data from the U.S. revealed that the NFIB Business Optimism Index improved to 105 in May from 103.5 in April while the IBD/TIPP Economic Optimism Index slumped to 53.2 in June from 58.6 in May.
In the meantime, President Trump, once again, criticised the Fed’s monetary policy. “The Fed Interest rate way too high added to ridiculous quantitative tightening! They don’t have a clue!” Trump said in a Twitter thread aimed at explaining the euro’s weakness as the reason behind the uncontrollable number of tourists pouring in into the continent. Later in the day, White House economic advisor Larry Kudlow told CNBC that bond markets were signalling that the Fed went too far with rate hikes and added that Trump was not calling for a “lower dollar.”
Euro – European Markets
The euro recovered the losses that it suffered on Monday against the dollar despite the disappointing sentiment data but closed the day lower vs the pound sterling. The monthly survey published by the Sentix showed that investor confidence in the eurozone deteriorated in June. “The renewed escalation in the US-China trade dispute is also having a considerable impact on the eurozone economy. The overall index fell by 8 points to -3.3 points in May,” Sentix said in its publication and explained that a recession in Germany was very likely. “In Germany, the situation is even more serious as the overall index slides back into negative territory for the first time since March 2010.”
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK on Wednesday.
US: The U.S. Bureau of Labor Statistics will publish its inflation report, which is expected to show that the core Consumer Price Index remained unchanged at 2.1% on a yearly basis in May.
EU: In the absence of significant macroeconomic data releases from the euro area, ECB President Draghi and Governing Council members Coeure and De Guindos’ speeches will be watched closely by the market participants on Wednesday.