Markets are opening up after the shocking events of the Trump assassination attempt (and yet more disappointment for football fans in England.) The former has seen betting odds increase in favour of a Trump victory in the US election in November. His proposals are centred on tax cuts, immigration controls, and broad-based tariffs on imported goods. This could add to inflationary pressures over the longer term and likely mean that the Fed has less of a chance to cut interest rates than if Biden wins the presidency. That would be dollar positive and hurt the bond market, while stocks inital bump higher is curtailed. All that said, there is still four months until voting day so much can happen.
Last week, falling US inflation set the scene for a Fed September rate cut. Markets are now fully priced in for that, with a soft landing apparently delivered. History tells us that in itself is an impressive feat, with currently little evidence of major recessionary headwinds. It also means the dollar took a hit after the CPI release, which was exacerbated by Japanese FX intervention that propped up the yen. Going into this week, we will be watching the 10-year Treasury yield and so the greenback too for any follow-though selling, as they both teeter on support. Japanese intervention will also be interesting, as it could be entering a new phase with the authorities selling pre-FOMC and post-CPI, and not due to any ramp up in volatility and speed of currency moves.
Thursday’s ECB meeting could be a bit of a nothingburger “summer” meeting with the following September rendezvous far more important. Quarterly staff economic staff projections will be published then, and the ECB appear to be relatively confident in their future inflation forecasts. Services inflation remains sticky with core inflation too high for any near-term policy action. EUR/USD is close to the June highs at 1.0916, with the bulls eyeing up the March top at 1.0981.
It’s the middle of the month so that generally means a week full of UK data. We’ve been starved of comments from BoE officials recently due to the UK election, but last week seemed to pour coldish water on an August rate cut from various MPC members. CPI and wage growth figures are still the most important data points and risk events for the pound. Cable has had two strong weeks of gains and taken the manor into overbought territory. EUR/GBP has taken out the June low and the August 2022 low at 0.8339 on the bear’s radar.
