US dollar rises on talk of White House tax stimulus
The dollar has started the week in a positive fashion, rallying against both the euro and the pound on headlines regarding potential US tax stimulus.
T
alk in the markets yesterday was not focused on monetary policy, but that of fiscal policy. There had been speculation on Monday that the White House was considering a payroll tax cut in order to stimulate the US economy. While an encouraging development, it is worth noting that this would have to be forced through the Democratic controlled House, which is fairly unlikely. This followed Sunday’s news that Germany was considering freeing up 50bn euros of spending in the case of a slowdown. The relatively modest nature of the funds meant that the reaction in the FX market was limited.

Elsewhere, President Trump continued to talk up the need for Federal Reserve policy easing yesterday, stating that he thought the Fed should lower rates by 1% over a short period of time and consider reintroducing its QE programme. His comments should, of course, be taken with a pinch of salt given his desire for a weaker US dollar, and indeed traders largely brushed the news aside.

Investors should get an early idea as to whether Trump’s rhetoric is having any bearing whatsoever on the FOMC, with chair Jerome Powell to make his semi-annual testimony to congress on Thursday and Friday. We expect Powell to pave the way for another 25 basis point rate cut at its September meeting. Yet, with domestic economic data proving resilient in the face of trade uncertainty, we do not believe that this will start a full blown easing cycle. In the meantime, investors will be dissecting Wednesday evening’s Federal Reserve meeting minutes.

Sterling falls as optimism over UK economy fades


In the UK, Sterling fell back below the 1.21 mark this morning as optimism over recent solid data faded and investors refocused their attention on growing ‘no deal’ Brexit concerns.

PM Boris Johnson will be meeting other world leaders at the G7 summit in France later this week, with the topic of Brexit certain to be on the agenda. Johnson called for both France and Germany to change their stance and open discussions on a new exit deal on Monday. The possibility of this actually materialising is, however, slim given the EU’s reluctance to renegotiate and the market is far from getting carried away.

With the clock ticking down until the 31st October exit date, time is running out for the PM to find a solution. We think that the Pound is likely to remain relatively rangebound up until parliament returning from recess on 3rd September. From then on, anything is possible and volatility in Sterling is likely to be sky-high.
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