A healthy dose of scepticism

​​​​​​Today's news headlines:

  • ‘Jay Powell says ‘room to build’ on US economic expansion’ – The Federal Reserve has signalled that it will look for ways to increase workforce participation in a bid to avoid a fall in inflation expectations. The chairman, Jerome Powell, said that economic conditions are generally good in the US but there’s plenty of room to build on the current gains as America’s economic expansion continues into its 11th year. Powell’s comments suggest a shift in focus – away from the ongoing US-China trade dispute and slowing global growth – to more domestic issues. (FT)
  • ‘Conservatives' poll lead over Labour narrows to 11 points - Kantar poll’ – The Conservative party’s lead in the polls has diminished from 18 points to 11 in the past week according to a new poll released today. It’s the second poll in two days to indicate a narrowing in support for the Tories after an ICM report on Monday gave the Conservatives a 7-point lead, down from 10 points a week earlier. (Reuters)

Horoscope sentiment 

It’s been some time since we’ve seen a market dynamic as strange as this. Markets hang on every whisper of US China trade and search for the groundhog that is German growth, in order to determine the days sentiment. Much like starting your day with a horoscope – and largely illogical in the same way - markets seem to change their position on trade and growth daily and with the slightest provocation. 

Just this morning both mythical beasts have been sighted. According to a Chinese Ministry of Commerce statement, China and the US ‘reached consensus on properly resolving relevant issues’ and will stay in contact to resolve remaining issues. Well that’s definitive; they are working on a phase one deal and continue to keep contact, just like yesterday.

At the same time, numerous banks have said German deterioration is nearing an end.  There is no evidence mind you, but they quote the potential plateauing of some pretty awful economic sentiment readings from Germany.  Don’t get us wrong, we’re open to changing our opinion, but faith-based economist forecasts are not our brand of snake oil.

All the while, and despite these daily horoscope readings, the currency market has hardly moved.  In fact, over the past week the US yield curve – a measure of borrowing cost across a range of maturities – has been flattening, which is a traditional sign of lower inflation expectations. US Fed Chairman Jerome Powell has said that he is happy with the current monetary policy setting, which suggests the Fed aren’t going to relentlessly push inflation higher. To recap, inflation expectations are falling but the market has higher hopes today…make of that what you will.

Bottom line:  There is a strange inconsistency to the market’s horoscope-induced faith, which is at odds with interest rate moves.  Either you see an improvement in fundamentals and a phase one deal, improving your inflation outlook or you don’t.  It rings hollow to see better fundamentals and phase one trade deal and then expect no inflation uptick. If both conditions exist, it implies there is little perceived benefit of these two events – since it’s not improving the outlook – and then what are we talking about really?

GBP/USD

Yesterday, Sterling was supported as pre-election polls continued to favour the Conservatives over the Labour party, albeit by a narrower margin. This, along with their pledge to end the UK’s 3-1/2 year political uncertainty took the Pound briefly up above the 1.29 level in stark contrast of Friday’s 10-day lows. The overnight strengthening of the US Dollar helped to keep a lid on the move higher, with an improvement in US-China trade sentiment underpinning demand for the Greenback.

GBP/EUR

An intraday move higher in the Pound trade weighted index temporarily took the pair back through the 1.17 level. The German IFO Business climate came in broadly as expected but the institute indicated that Germany’s manufacturing sector is still in recession. The currency pair is still trading in an upwards trend channel, with the next significant level around the March high of 1.1803.

EUR/USD

As previously mentioned, positive comments from Fed Chair Powell and progress towards a partial US-China trade deal has brought the pair back to the familiar low-1.10’s territory. As we’re now trading below the 50-day moving average (1.1041), there could be little resistance towards September/October’s low’s around the 1.09 handle.