Federal Reserve’s ‘hawkish cut’ boosts dollar
The Fed's "hawkish cut" decision on Wednesday rattled financial markets, and matters were not helped by a flareup of trade tensions between China and the US later in the week after the sudden imposition of another 10% tariff by Trump.
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he US dollar rallied against most of its major peers, buoyed by higher yields after the Fed decision. The best performing currency was, however, the Japanese yen, which benefited from safe haven flows as equity markets worldwide fell. The week was particularly painful for emerging market currencies, weighed down by the Fed's apparent reluctance to cut further and sharp falls in commodity prices after Trump's announcement of additional tariffs.

This week is a typically sleepy August one, without major policy decisions or economic releases to drive markets. A notable development last week was the late recovery in the euro, which finished the week only slightly down against the dollar in spite of the FOMC hawkishness, strong US payrolls and yet more negative news on the inflation front. We are keen to see whether the euro continues to hold out relatively well this week.

GBP


The August meeting of the Bank of England had no major impact on Sterling, as the Bank kept policy unchanged and markets continue to focus exclusively on Brexit developments.

Our view that no solution to the Brexit dilemma is possible without a general election was boosted last week when a pro-Remain Liberal Democrat victory on a Conservative seat cut Johnson's parliamentary lead to just one. Sterling in fact managed to stabilise last week, ending the week essentially unchanged against the euro.

EUR


The European Central Bank must have been disappointed by the July flash inflation report. Core inflation dropped 0.2% to 0.9%, and is showing no signs of the sustained upward trend it would need to reach the ECB target level. After the disappointing PMI and inflation news, the ECB is now all but certain to introduce additional monetary stimulus at the September meeting.

USD


It is somewhat surprising that the US dollar didn't perform even better versus its main G10 peers than it did last week. In addition to the Federal Reserve surprising markets with a more cautious than expected outlook for future cuts, the payroll report for July was quite strong, and included a positive surprise in wage growth. Perhaps dollar holders were rattled by yet another outburst from Trump in the US-China trade conflict.

With little economic news of importance this week, headlines around the Chinese retaliation should drive the US dollar performance.
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