So holiday season is upon us and with a data light week ahead. It could be a typical summer market, marked by little movement, with outbreaks of sharp volatility. We had a very interesting close to the first week of August. The US dollar had been feeling the painful effects of Donald Trump, after it’s sharp year-to-date downtrend. After a positive start to his tenure and the temporary surge in US dollar, fueled by a successful electional campaign, Trump was championing the US dollar strength. However, on a regular basis, we are experiencing challenging soundbites about his perceived collusion with Russia in the run up to the elections and how this may cast a serious doubt on his continuation as President of The United States (POTUS). His fiscal policy proposals are being perceived by some as weak, more so, given they lack unified support across the House of Representative. Fresh from defeat with his Obamacare replacement, he now has to get the Republican Tax Reform proposal through by the end of the year. Any failure to progress policy here will entirely unwind the “Trump reflation trade”. We now sit at lower levels against G7 currencies than when he came to power.
Further headwinds exist for the President as the previously strong performance of the US economy shows signs of faltering. Last week we were trading the highs in EUR/USD and even GBP/USD. This despite the backdrop of an ever uncertain Brexit and a dovish, but nervous MPC. The data we are seeing from the US is telling us a positive story, none more so than the benchmark NFP, Unemployment Rate and Wages Data which we saw last week. Higher than expected employment, lower month-on-month employment and a slight increase in wages brought the dollar-bulls back. Market psychology was also firmed up as the dollar’s YTD downtrend halted around key long-term support, amidst extremely oversold momentum readings. Finally, there was renewed interest for the market to buck the dollar trend and we saw a fightback. EUR/USD fell 2 cents from above 1.1900 to nearly 1.1700. Cable (GBP/USD) fell back from 1.3160 to 1.3020. Whilst the move was fully justified by the strength of the data, the key question for the week is “Where do we go now?”
This week we must keep an eye on developments at the White house. Both with regards to the developments in the Muller-led investigation into Donald Trump’s family’s financial affairs and conduct during his election campaign. Also, the development of a Tax reform plan strong enough to pass through the house. With the President’s popularity as low as any serving US Presidents (Including Nixon at the height of Watergate), it is fair to say that any detrimental news will outweigh the economic performance of the FED Reserve and the US. Following on from the positive employment and earnings data, it will be very interesting to hear from the Federal reserve committee members, to see what impact this data will have on future rate path. We have 2 members Bullard and Kashkari speaking this week and the market will be poised to see if there is a more hawkish done given Fridays data. Elsewhere, we have to wait until Friday for the CPI inflation data which will probably be the highlight of the week CPI m/m expected at 0.2% versus 0.0% last month, with Core CPI expected at 0.2% versus 0.1% last month.
In the UK we have Industrial Production, Trade balance and Manufacturing Data on Wednesday with little else of note this week. The latest headline grabber around Brexit was the story in the Sunday Telegraph, regarding the separation settlement between the UK and EU at an estimated to cost the UK £35Bln. This is a deal which Brexit negotiators are said to be pushing through whilst eurosceptics are on holiday. It is believed this hurdle needs to be surpassed before the further negotiations can be progressed. We also see the Reserve Bank of New Zealand meeting this Thursday, consensus expectation being we see no change to rates, but a possible shift to a dovish tone on forward guidance.