There have been many headlines ahead of European Union Commission President Jean-Claude Juncker’s meeting with US President Trump today in Washington, with President Trump as per form blowing hot and cold about the prospects of the EU and the US reaching a deal on import tariffs. In any case the Euro has weakened for the third consecutive session, suggesting that markets are pessimistic about the odds of the EU and US finding a mutually-acceptable solution. Focus tomorrow will turn to the ECB’s policy meeting, which is unlikely to be as market-moving as its 12th June meeting. Nevertheless, if the ECB fails to change its medium-term outlook Euro-bulls could be further disappointed and the Euro could lose further ground from the multi-year high recorded over the weekend.
Sterling has returned to its multi-month range, after having temporarily weakened last week following the release of soft wages, inflation and retail sales data for June, and markets are once again pricing in a chunky 21bp of rate hikes at the Bank of England’s policy meeting on 2nd August. The outcome of this meeting may well cause some Sterling volatility. However, the bigger issue medium-term for the UK and Sterling is still Brexit and specifically whether Prime Minister May, who has taken over negotiations with the EU, can muster a deal acceptable to all parties and avoid a Hard-Brexit scenario.
The Dollar has weakened a little more ahead of tomorrow’s release of preliminary US GDP data for Q2. Markets have had time to ready themselves for a significant rebound in GDP growth to 4-5% qoq annualised from 2.2% in Q1 and unless growth is well above or below expectations any Dollar move may not have much lasting power. Markets are likely to quickly refocus on the outlook for growth in coming months, in the context of a globalised trade war, and by extension on whether the Federal Reserve will hike once or twice more before year-end.
The Australian Dollar has been one of the most notable under-performers in the past 24 hours, with the release overnight of weaker-than-expected Q2 inflation numbers weighing on expectations that the Reserve Bank of Australia is in any way even ready to start considering a rate hike. Ultimately, the Australian Dollar is likely to continue lacking any clear direction until Australian macro data start to firm and allow the RBA to become even gradually more hawkish.
