July 18, 2024

“The dollar is now down nearly 2% in July to a four-month low so far, as the macro data has continued to weaken and the rates markets have piled in to bets on a September rate cut. The ECB is the main event today, and investors will latch on to any clues about the future for rate cuts.”

Tim Hallinan – Trading Director

Main Headlines

Donald Trump’s new running mate, JD Vance, addressed the Republican National Convention last night, presenting himself as a champion of the working class and as someone who can understand the everyday issues facing American people, as opposed to ‘career politicians’ like Joe Biden.

The UK government set out its growth agenda yesterday, pledging to make it easier to build infrastructure and give extra powers to local authorities. The Planning and Infrastructure Bill has been proposed to overhaul the planning process and ‘get Britain building’.

GBP

The pound has handed back around half of its post-CPI gains against the dollar and is now a touch softer versus the euro compared to earlier in the week. The UK jobs report this morning continued to show a gradual cooling in the labour market, with vacancies falling and claimants rising, but this is not yet translating into the progress on wage growth and services inflation that the Bank of England is looking for. Wage growth fell to 5.7% in the three months up to May, as expected, and kept markets leaning towards a September start date to the BoE cutting cycle. Of the bank’s three main indicators of inflationary persistence – labour market tightness, wage growth, and services inflation – it’s only the first that is demonstrating a sustainable trend downwards; the rest appear to be flatlining. Retail sales tomorrow morning are expected to have contracted by 0.6% in June, although with variables like the weather creating volatility in the measure, the forecasts have been wide off the mark recently.

EUR

The ECB decision today is unlikely to give markets the certainty they are looking for with regards to the path of rates in the eurozone. A pause is priced to a near certainty, and that’s largely because the data in the intermeeting period has not supported the case for further rate cuts, owing to renewed momentum in services inflation and stubborn wage growth. This outlook could have justified a pause last month, and while some policymakers appear to have wished that they could, too much overpromising in the prior months meant that they had cornered themselves into cutting to save reputational damage. They are not likely to repeat that mistake, and the expectation is that forward guidance remains non-committal, and that further rate cuts depend on extra progress being made in the data. That does mean that any signals for a September rate cut are likely to pull the euro lower, however.

USD

Another sharp fall yesterday saw the dollar plumb to a four-month low, as Fed speakers continued their synchronised dovish pivot and intervention nerves pulled up the yen. The Fed’s Williams argued that, after the recent disinflation, ‘we’ve got a few good months now’ and that a rate cut could be on the way in a few months’ time. Waller also seemed optimistic that inflation was on the right track, and he tends to hold similar opinions to Chair Powell. A slump versus the yen also had markets back on alert for intervention from Japanese authorities, who appear to have stepped in several times now over the past week, although we’ll have to wait for month-end data for confirmation. Jobless claims are the main data point today, and we’ll get a few more speeches from Logan and Daly at the Fed.

Markets

Volatility spiked yesterday as Trump suggested Taiwan needed to pay for US defence and the current administration threatened more extreme trade curbs to prevent China gaining access to advanced microchip technologies. The result was a tech selloff that sent the S&P 500 tumbling 1.4% and the tech-heavy Nasdaq falling by nearly 3% in its worst one-day fall since December 2022. The rotation into smaller stocks continued, however, with he price-weighted Dow hitting an all-time high.

Main Economic Events (All Times CET)

3:30am: Australian Employment Change
8:00am: UK Claimant Count Change, Wage Growth, and Unemployment Rate
2:15pm: ECB Rate Decision
2:30pm: US Unemployment Claims
7:45pm: Fed’s Logan speaks

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