Trump’s Wrath Overshadowed by the Looming FED, with UK Retail Sales and FED Monetary Policy Putting the Spotlight on the GBP and USD

Bob Mason
US Dollar Index

Earlier in the Day:

Donald Trump’s speech at the United Nations did little to the markets through the U.S session and Asian markets followed suit, with the markets almost treading water ahead of this afternoon’s FOMC monetary policy decision and release of the economic projections.

Key macroeconomic data through the Asian session was on the lighter side early in the day, limited to 2nd quarter current account figures out of New Zealand, which were better than forecasted, with the current account deficit narrowing year-on-year, providing some upside for the Kiwi Dollar.

Trade data out of Japan was positive, with an 18.1% surge in exports which lead to a return to a trade surplus, having been in deficit a year earlier. Imports increased by 15.2%, the increase attributed to rising costs for coal, liquefied natural gas and crude oil, the Yen having been on average 7.3% cheaper against the Dollar compared with August of last year.

Upbeat data and record gains in the U.S equity markets on Tuesday, providing some appetite for the equity markets, with only the ASX200 losing out on the day, though the gains were certainly muted ahead of the FOMC’s announcements later today.

Mixed sentiment through the session saw the Dollar down 0.14% at ¥111.743 at the time of writing, while the Kiwi Dollar (+0.55%) and Aussie (+0.35%) made strong gains through the Asian session, with volatility for the Kiwi Dollar expected to persist through to the election result on Monday.

The Day Ahead:

It’s a big day ahead for the markets and the Pound and the Dollar in particular, with August UK retail sales figures scheduled for release this morning.

The Pound had taken a tumble at the start of the week, following less hawkish than anticipated commentary from the BoE Governor at the IMF, with the prospects of a near-term rate hike now considered priced in. The reality remains however that whether the BoE makes its move in November and the pace of monetary policy normalization thereafter will ultimately be data dependent.

This morning’s retail sales figures will be the first set of stats out of the UK since the shift in the monetary policy committee’s forward guidance at last week’s meeting and we will expect the Pound to be particularly sensitive to the numbers. Anything in line with or better than forecast will likely be considered good enough for the markets to continue pricing in a November move, but for the Pound to make any sizeable gains the sales will need to impress.

If August’s BRC Retail Sales Monitor numbers are anything to go by, the numbers will be Sterling positive, but as has been the case in previous months, the sales monitor numbers have not always translated in positive sales numbers and the uncertainty will likely peg back the Pound ahead of the release.

At the time of writing, the Pound was up 0.08% at $1.3514

Once the numbers are out, focus will shift across the Pond to the Dollar, with there being plenty of uncertainty over what’s to come from the FOCM meeting.

The economic projections will provide the markets with more a reliable indication on whether there is likely to be a 3rd rate hike before the end of the year, while there are also expectations of the FED beginning to sell down the balance sheet. Hurricanes Harvey and Irma have quite likely muddied the waters however and how the Committee projects the economy through the final quarter and the first quarter of next year will be of particular influence on the outlook on rates. Voting member Dudley had said that the hurricanes would have no influence on monetary policy, but the doves may have something to say about such an optimistic outlook.

The good news was that August inflation picked up, while the bad news was the disappointing retail sales figures release last Friday. Stats out of the U.S in the run up to the monetary policy decision this week, are unlikely to be of material influence and we can expect some jitters ahead of the announcements.

The Dollar Spot Index was down just 0.01% at 91.781 at the time of the report, with market sentiment towards this afternoon’s FOMC decision and outlook the key drivers through the early part of the day, the uncertainty being over the FED’s outlook on interest rates for the remainder of this year and for next year.

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