Pound’s pause for breath continues
Today's news headlines:
- 'Dollar scales 10-week high vs Yen on upbeat US GDP’. Yesterday’s news reinforces the Federal Reserve’s stance, which was arguably slightly more bullish than the underlying market. The chance of US interest rates now increasing before the year-end has increased slightly. (Reuters)
- 'ECB to delay rate hikes to next year, restart cheap loans soon: Reuters poll’. With inflation stuck well below European Central Bank (ECB) targets and set to remain there for some time, concerns are growing among economists that the central bank may have missed the opportunity to start normalising monetary policy. (Reuters)
- 'Trump officials offer mixed signals on trade deal with China’. Although there’s optimism over the prospects for a significant deal to be struck, concerns remain around how a deal would be enforced. Donald Trump has said that he is willing to walk away from the table, if necessary. (New York Times)
US monetary policy
The outlook for US interest rates was given some fresh clarity during yesterday’s session after the Q4 growth reading came in somewhat better than expected. This knocked the market’s perception that a rate cut may be seen by the year-end and validated the stance taken by Federal Reserve Chief Jerome Powell during his two days of testimony in Washington this week. The Dollar gained ground as a result and given the worsening global trade situation, has the potential to retain some allure.
German inflation data released yesterday may have come in above expectations, but it’s still some way from the European Central Bank’s target of just below 2.0%. Today’s pan-European numbers will be closely followed, but there’s growing concern that with the global economy slowing, the ECB may have now missed the opportunity in this economic cycle to tighten monetary policy at all. Messages like this, especially when added to the more upbeat rhetoric seen across the Atlantic, will have the potential to continue dragging on the Euro.
The Pound has now given up around a cent from the week’s earlier highs. Upbeat US Gross Domestic Product (GDP) data and an absence of fresh Brexit narrative are giving the US Dollar the upper hand.
The Euro attempted to break out of its recent narrow range against the US Dollar during yesterday’s session, but the upbeat US GDP print initiated a quick reversal. Given the potential for further economic headwinds within the Eurozone, the pair could see further downside pressure.
The Pound may have retreated from its 21-month highs against the Euro, but further downside pressure appears limited. More evidence that the ECB will need to provide fresh stimulus measures could see the Pound advance further.