Under pressure

Today's news headlines:

'Germany dodges recession with surprise third-quarter growth’. Germany defied expectations of entering a technical recession in Q3, posting a modest 0.1% gain instead. Growth was led by consumer and government spending, as well as a rise in German exports; investment in machinery and equipment fell. The positive reading will dampen speculation that fiscal stimulus is necessary to avoid recession, although the ECB is likely to continue to pressure the European powerhouse. (Bloomberg)
‘Hong Kong protests sting wary expats’. Multiple schools and transportation networks stayed closed for a fourth consecutive day on Thursday as violent protests in Hong Kong continued. International students have sought help from their home countries with many planning to leave the country amid the chaos. (Financial Times)

Call for stimulus

It was only in yesterday’s commentary that we highlighted emerging market weakness, and then overnight, Chinese data materially undershot forecasts. Fixed asset investment, Industrial Production and Retails Sales data were all worse than expected. You’ll note these metrics represent a broad swathe of the Chinese economy, not a single sector, which compounds the bad news. Some commentators have pointed to more moderate declines when looking at smoothed average numbers, which are indeed more representative of the general trend. That’s fair, but our focus is more on the breadth and consistency of decline not contextualising a single data point. These releases put pressure on the Peoples Bank of China to ramp up stimulus to stave off a more precipitous deterioration heading into year-end.

The gradual upward drift of the Greenback since the start of the month has seemingly come to a halt in advance of various Fed speakers today. The move to this point has largely reflected hawkish Fed statements in the last policy meeting—ironically, they cut rates while signalling a halt in policy easing—and demonstrates a lack of appetite at the Fed to buoy asset markets despite declining growth abroad. When examining recent comments from various Fed speakers, we note there seems to be a broad consensus surrounding the adequacy of the current policy setting, while some have even suggested it is loose (i.e. easy) given current inflationary forces. On the face of it, this portends further Dollar strength, but one reason for scepticism might be a renewal of Donald Trump’s interference in monetary policy communication; most recently he said the Federal Reserve is hurting America by pursuing a positive interest rate policy.

Bottom line: Although it seems likely that today’s various Fed speakers will reiterate their wait-and-see policy prescription, the President’s comments open doubt in some minds and suggests the Fed’s independence is not a forgone conclusion. To put it in context, the President’s negative interest rate aspirations have been almost unanimously excluded as a policy tool at the Fed. The question is whether the central bank might nudge in a modestly more dovish direction given the growing political heat.

GBP/USD

Yesterday, the pair traded in a tight 36-pip range as markets await the UK general election result next month. The trade-weighted US Dollar Index remains buoyed by its 50-daily moving average while the Sterling equivalent stays flat. This week’s 1.28 - 1.29 trading range looks like it will hold throughout today’s session.

GBP/EUR

A weaker Euro combined with a steady Pound has kept the cross-currency pair in the high 1.16’s this week, reaching a ceiling of 1.1685. A light day of data from the UK and Eurozone means the pair is unlikely to deviate too far from current levels as investors keep an eye on the UK’s general election campaigns.

EUR/USD