Reaction to economy becoming more marked

The dollar reacts to so many wide ranging and varied stimuli that it is often difficult to dissect the drivers and ascertain their importance.

Contrasting data releases add to the confusion despite being generally strong.

Since the Fed embarked on a rate hike path ostensibly to pre-empt the effect on the economy of President Trump’s election but, in reality, to take some steam out of the Stock market, the economy has been high on the agenda of market analysts.

Data had been encouraging the view that a further hike was probable this year although Friday’s employment report has dampened that feeling somewhat.

The recent final cut of the Q2 GDP encouraged analysts despite inflation being below expectation. Comments from one FOMC member yesterday cooled rate hike expectations. Lael Brainard revealed that inflation is “well-short” of target so the FOMC should be cautious about raising rates. Brainard is a permanent member of the FOMC, as regional Fed Presidents rotate their membership, so she is party to both the mood and discussion over an extended period expressing her views in accordance with the attitude of members, despite her own dovish view on the economy.

Return of Parliament brings a little relief

The return of the British Parliament yesterday brought with it hope that the necessity for the Government to consult with members would drive Brexit activity forward

Brexit Minister, David Davis, made a statement briefing the House of Commons on the progress that has been made despite the derision with which he was greeted by the opposition.

Davis decried the view of the EU Chief Negotiator that very little progress had been made and called upon Michel Barnier and his team to be more flexible and pragmatic. He confirmed that the “divorce bill” was the single most contentious matter remaining also saying that the two sides remain far apart on their view of how much should be paid.

The amount to be paid is open to interpretation due to a number of “grey areas”. One such example is the British contribution to the EU overseas aid budget which the U.K. is not obliged to continue to contribute to despite the EU feeling it should. Such are the complexities of the negotiation and it is certain that once Brexit is complete, the next version of the Lisbon Treaty will contain clauses that make calculation of the bill for any future “exiteer” simpler.

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Currencies responding to varying stimuli

The dollar reacted to the comments of Lael Brainard falling close to recent lows against a basket of the currencies of its main trading partners. Versus the pound it fell through the psychologically important 1.3000 level as traders felt relief at even the smallest Brexit progress. The move was more likely in reaction to the extreme oversold condition of the pound despite the continued economic and political concerns.

The Euro continued its slow correction versus sterling falling to 0.9132 as hopes for the beginning of the tapering of the Asset Purchase scheme at tomorrow’s ECB meeting fade.

The JPY is gaining from the North Korean situation and the growth of risk aversion but is under a little pressure as the economic concerns over consumption weigh. Japanese workers’ wages fell in July from a year earlier on a drop in summer bonus payments, casting some doubt on the sustainability of a recent improvement in consumer spending.

Elsewhere the AUD rose despite the RBA remaining on hold. The RBA Governor in comments following the RBA meeting said that the economy is picking up as are wages. Analysts have interpreted these comments as warning of an imminent rate hike and pushed the AUD to a six-week high.

The Bank of Canada meets later today and is expected to hold rates as they are following last month’s hike despite a higher than expected rise in Q2 GDP.

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