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  • richard evans

Will Powell open the door for a Fed rate cut in September ?

Good morning

 

Well yesterday was another fairly quiet day, the key highlight being a bit of GBP strength against both USD and EUR.  GBPUSD crept up to 1.2845, not far short of the June highs around 1.2860, while GBPEUR pushed up to the 1.1850 level.  The new UK Chancellor Reeves spoke, assuring us there would be no rises in VAT, NI or Income Tax.  I’m thinking corporation tax and tax on dividends could well increase though, they’ll get the money from somewhere, that’s for sure. 

 

BoEs Haskell also spoke yesterday, he is generally hawkish and gave the usual warnings about a tight labour market and wage prices, and that although there were some encouraging signs on inflation he’d be happy to keep rates on hold.  The next meeting in August will be his last, I don’t think he’s yet been replaced, I believe Reeves gets to make that appointment.  Not sure she’ll want anyone quite as hawkish as Haskel.

 

Once again, GBP has been unable to capitalise on its gains and is now a little off those highs, as I type GBPUSD is back to 1.2805 and GBPEUR is around 1.1830.

 

My USDJPY downside option managed to just about break even, you may remember we’d paid 40 yen pips for the Monday expiry 161.00 USDJPY put, hoping to see some intervention by Japan in the less liquid markets over the US holidays last week, but that was not to be.  Spot was just low enough to make 40 pips on the spot on exercise to recoup the premium paid.

 

The French left wing supporters prepared a riot in case the right wing got elected.  As we know, the left wing did far better than expected so their supporters rioted anyway.  Incredible.  Some press reports suggests the French left are looking at imposing a 90% tax on any earnings over EUR400,000, among other radical proposals, however with the vote as it is neither the right nor the left are likely to be able to get their ideas approved in Parliament, which perhaps explains the stability of EUR since the weekend.  EURUSD is now 1.0825.

 

Fed Powell speaks today in his monetary policy report to congress.  The testimony comes amid signs of a slowdown in the US economy, it will be interesting to see whether he makes any reference to the recent weaker data, and indeed to US inflation which we’ll get on Thursday.  It is possible he’ll mention the ongoing political situation in the US, or indeed the UK and France for that matter.  The key is really how much he opens the door to a September rate cut.  Its unlikely he’ll do so too much but any comment at all will certainly be closely watched, he has recently mentioned the Fed’s mandate is to help employment as well as inflation, after the weaker nonfarms last week any repeat of this could lead markets to assume a september cut is on the cards.

 

We have a rate announcement from New Zealand in the early hours of tomorrow morning.  They kept rates unchanged at 5.5% last time out in May, indeed as they have since the last 25bps rise back in May 2023, but they have been pretty hawkish at most meetings this year, warning of the ongoing risk for further upside inflation and making it clear they are leaving the door open for rate rises.  I see no reason for there to be any change in this stance, so unless they surprise with a more dovish message I’d expect NZD to find support.  For the record, GBPNZD, AUDNZD and NZDUSD are 2.0900, 1.1000 and 0.6125 respectively.

 

We still have a couple of days until the key US inflation numbers.  In the meantime, the small matter of the Euro 2024 semi-finals, starting with Spain v France this evening.  France had been second favourites at the start of the tournament but they have been a bit disappointing and Spain have put in some decent performances, which makes the latter marginal favourites for this match.  It’s likely to be another tight one.

 

Have a great day.  If you go outside do be careful of the extreme July temperatures.  They are likely to be up near 20°c.  With a bit of rain. 

 

-  14.15 Feds Barr speaks

-  15.00 Feds Powell speaks

-  18.30 Feds Bowman speaks

-  02.30 China CPI

-  03.00 RBNZ rate announcement

 

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