Good morning
After a pleasant couple of days visiting colleagues and clients I am back at my desk wondering how, after a reasonably hawkish FOMC, the US dollar is weaker across the board. I suppose the Fed were broadly in line with expectations, confirming the economy is making progress towards its goals, that they are watching upside inflation risks and will assess asset purchases at coming meetings. Perhaps the market was looking for a clearer time line on reducing asset purchases, or perhaps Powells insistence that Fed is still a long way from meeting its goals was enough to drive the dollar lower. Some had been thinking tapering may be announced for later this year, the feeling seems to be now that it could be announced in Sept, to start in early 2022.
After the sharp declines in China equity prices in recent days, China have worked hard to reassure the markets that it will think about market impact before it introduces further policies, and it seems to have worked, with China shares very much in positive territory. It is possible that China themselves have been buying stock to support the market. The news that China will still allow firms to IPO in the US also brought some relief to equities.
So with FOMC out of the way, and China doing its best to calm things down, we are left with the third major risk factor which is of course Covid. Infections in the UK appear to be on the decline despite the recent opening up. How can this be? Is it down to vaccines? Is it down to people being outdoors due to better weather? Schools breaking up for holidays must have helped. Or is it that people are not reporting positive lateral flow tests, or not getting tested, for fear their holiday, or those of their close contacts, may be ruined? I’m thinking it’s a little bit of all of the above.
News that people are beginning to delete the tracing app to avoid getting ‘pinged’ isn’t great but I’m afraid its understandable. From the very start of the pandemic I said vaccines and regular testing are the key. I do believe that if a colleague, family member or friend tests positive, you should have to take a couple of tests that, iof negative, mean you do not need to isolate. This is being trialled. Ideally we’ll get some new tests that are quicker and more accurate.
So for now its down to the vaccines and still the hope that they work. The Pfizer boss has said that the effectiveness of their vaccine does reduce after six months or so to 84%, suggesting the risk of hospitalisation will increase as time goes on, and that a booster will be needed which would be enough to protect against the delta variant. Quite how long the vaccine will last them remains to be seen but I presume that vaccines will be improved over time, or modified to a tablet form that one could take monthly for example.
GBPUSD is trading up at 1.3945, the highest level for a month or so and within sight of the 1.4000 area that capped a couple of times in late June. EURGBP is down to 0.8510 (GBPEUR 1.1750), I’m watching the April lows around 0.8470 (1.1805). ECBs Panetta has said that they would only raise rates if inflation is sustained above 2% which really means we’re in for a very long wait. With such a dovish outlook, I do still think GBP should continue to make gains against EUR.
US GDP the highlight of a busier calendar today, expected to show a bounce to 8.5, even 9%.
- 09.00 German unemployment
- 09.30 UK consumer credit, mortgage approvals
- 10.00 EU consumer confidence
- 13.00 German CPI
- 13.30 US GDP, core PCE, initial jobless claims
- 15.00 US pending home sales
- 23.45 NZ building permits
- 00.30 Japan unemployment
- 00.50 Japan industrial production, retail trade
- 07.00 German GDP
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