US Dollar Stays Strong as Attention Shifts to FOMC Announcements
What’s been happening?
Pound Sterling – UK Markets
The British pound was able to show some resilience against the euro on Tuesday but continued to weaken vs the dollar and touched its lowest level in more than two years as the Brexit uncertainty continues to make it difficult for the currency to gain traction.
Following her meeting with British Prime Minister Boris Johnson, Scottish First Minister Nicola Sturgeon said she believed that Johnson is heading for a no-deal Brexit and added that the situation for Scotland and the whole UK was extremely dangerous. “Whatever Boris Johnson might be saying publicly about his preference being to strike a deal, in reality, he is really pursuing a no-deal Brexit,” Sturgeon stated. “It is not in my view a democratic position to block the right of the people of Scotland to choose and I made that clear to him.”
Later in the day, during his phone call PM Johnson, Irish Prime Minister Leo Varadkar said that he told his British counterpart that the European Union was united its view that the Withdrawal Agreement cannot be reopened. "Alternative arrangements could replace the backstop in the future but thus far satisfactory options had yet to be identified," Varadkar said. "Northern Ireland's Good Friday Agreement requires the sovereign government to exercise power with rigorous impartiality." On the same note, PM Johnson’s office in a statement noted that Johnson repeated that the UK will leave the EU “no matter what” on October 31 and that any deal must abolish the backstop during the conversation.
US Dollar – US Markets
The data published by the US Bureau of Economic Analysis (BEA) on Tuesday showed that the core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred gauge of inflation, ticked up to 1.6% in June from 1.5% but remained below the FOMC’s target of 2%. Further details of the BEA’s publication revealed that personal spending in the same period increased by 0.3% on a monthly basis as expected and personal income rose 0.4% to match May’s reading.
Later in the day, the Conference Board’s Consumer Confidence Index jumped to 135.7 in July from 121.5 in June and beat the market expectation of 125 by a wide margin. The CB's Present Situation Index also improved to 170.9 from 162.6, providing an additional boost to the dollar. The US Dollar Index, which tracks the USD’s value against a basket of six major currencies, stretched to a fresh 2-month high above 98 but went into a consolidation phase in the second half of the day as investors started to move to the sidelines while waiting for the FOMC to announce its interest rate decision and policy outlook on Wednesday.
Meanwhile, US President Trump urged the Federal Reserve to make a “big rate cut” in a Twitter thread and warned China not to wait for the 2020 general election, saying that he would offer a much tougher deal or no deal at all if he is reelected.
Euro – European Markets
The shared currency extended its recovery against the dollar into a second straight day but posted modest losses vs the pound sterling on Tuesday. European Commission’s latest Business and Consumer Survey showed that the consumer sentiment improved slightly in July with the headline Confidence Index edging higher to -6.6 in July from -7.2 in June to match the market expectation. Further details of the report, however, painted a mixed picture regarding the business confidence. “The Economic Sentiment Indicator (ESI) decreased slightly in both the euro area (by 0.6 points to 102.7) and the EU (by -0.3 points to 102.0),” the press release read and showed that the ESI recorded its lowest reading since March 2016.
“Industry confidence registered a marked decrease (−1.8), which moved the indicator clearly below its long-term average,” the EU Commission noted. “The slight decline in services confidence (−0.4) was driven by managers' more pessimistic demand expectations, while their views on the past business situation and past demand remained broadly unchanged.”
Earlier in the day, the Gfk Consumer Confidence Index for Germany inched lower to 9.7 for August from 9.8 in July but came in line with analysts’ estimates.
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK on Wednesday and investors will remain focused on the political headlines.
US: The FOMC will announce its interest rate decision following its two-day meeting and publish its policy statement on Wednesday. A 25 basis points rate cut already seems to be priced in the markets and unless the Fed makes a surprise announcement such as a 50 basis points rate cut investors will stay focused on Chairman Powell’s press conference at 18:30 GMT.
EU: The European economic docket will feature the second-quarter GDP and July inflation data for the eurozone published by the Eurostat. Germany’s Destatis will release the unemployment rate as well.