Weekly Wrap – The U.S Dollar Rally. Will the FED Hit Pause on a Rate Cut?

The Stats

It was a particularly quiet week on the economic calendar in the week ending 26^th July,

A total of 29 stats were monitored throughout the week.

Of the 29 stats, 12 came in ahead forecasts, with 16 economic indicators coming up short of forecast. Just 1 stat was in line with forecasts in the week.

Looking at the numbers, 10 of the stats reflected an upward trend from previous figures. Of the remaining 20, 18 stats reflected a deterioration from previous.

With the economic data ultimately skewed to the negative, the Dollar found strong support in the week to end the week in the green. While the markets continued to price in a FED rate cut in the week ahead, it was the stats that did the talking. Better than expected service sector PMI numbers out of the U.S contributed to the Dollar’s upside, while economic data out of the Eurozone disappointed once more. The U.S Dollar Index (“DXY”) rose by 0.88% in the week to 98.01.

Out of the U.S

A relatively quiet week on the data front saw the stats skewed to the positive, based on forecasts.

A negative start to the week saw housing sector data come up short of forecasts on Tuesday, with existing home sales falling by 1.7% in June. Economists had forecast a 0.2% fall, following a 2.9% rise in May.

The fall in existing home sales came in spite of U.S mortgage rates hovering at close to 3-year lows.

On Wednesday, new home sales impressed, however, with sales up by 7% on June, month-on-month.

Housing sector numbers ultimately had a muted impact on the Dollar, however. A pickup in service sector activity in July and better than expected durable goods orders and weekly jobless claims figures impressed.

The service sector PMI rose from 51.5 to 52.2 in July. While the manufacturing sector stagnated, with the PMI falling from 50.6 to 50.0, it was the service sector numbers that matter.

On Thursday, the durable goods orders impressed, with a 2% rise in June, with core durable goods orders rising by 1.2%. Initial jobless claims also came in better than expected, with claims of just 206k, down from 216k from the previous week.

Wrapping up the week was 2^nd estimate GDP numbers on Friday. The economy grew by 2.1% in the 2^nd quarter. Whilst downwardly revised from a 1^st estimate 3.1%, the numbers were better than a forecasted 1.9%.

The U.S GDP Price Index rose by 2.5%, quarter-on-quarter, also coming in ahead of forecast. The Price Index had risen by 0.6% according to 1^st estimate figures.

Outside of the numbers, news of a resumption of U.S – China trade talks on Monday was also a positive for the Greenback.

In the equity markets, the U.S majors closed out the week in the green. The NASDAQ and S&P500 led the way, rising by 2.26% and by 1.65% respectively. The Dow rose by just 0.14%, supported by a 0.19% gain on Friday.

Out of the UK

It was a particularly quiet week on the economic data front.

The UK’s CBI Industrial Trend Orders weighed on the Pound on Tuesday, falling from -15 to -34. Economists had forecast that the index would hold steady at -15.

With the numbers negative for the Pound, the market reaction to Boris Johnson’s leadership race victory added further pressure after an initial upswing.

The prospects of a no-deal departure from the EU remain high and the EU reminded the markets of just how unwilling they are to renegotiate a failed deal.

In spite of positive economic numbers ahead of the week, a shift in sentiment towards the UK economy added pressure on the Pound. Talks of the UK entering a recession did the rounds late in the week, raising the prospects of a near-term BoE rate cut.

The Pound ended the week down by 0.94% to $1.2384.

For the FTSE100 rose by just 0.54% in the week, supported by a 0.80% rise on Friday. The fall in the Pound continued to have a relatively muted impact on the 100 in the week.

Out of the Eurozone

It was a particularly busy week.

Key stats included prelim private sector PMI numbers out of France, Germany, and the Eurozone on Wednesday and German business sentiment figures on Thursday.

Wednesday’s prelim PMI numbers certainly disappointed on the day.

According to the latest Markit Surveys, Germany’s manufacturing PMI fell from 45.0 to 43.1, the lowest level in 84-months. The service sector PMI also disappointed. The PMI fell from 55.8 to 55.4, with services companies seeing their weakest optimist since Dec-14.

Things were not much better out of France, where the manufacturing sector stagnated in July. The PMI fell from 51.9 to 50.0.

Negative numbers out of France and Germany weighed on the Eurozone PMI numbers. The Eurozone’s July composite PMI came in at 51.5, down from 52.2. The manufacturing PMI slid from 47.6 to 46.4, with the services sector PMI falling from 53.6 to 53.3.

The stats were no better on Thursday. The IFO Business Climate Index fell from 97.5 to 95.7 in July. The IFO Current Assessment fell from 101.1 to 99.4, with the Business Expectations Index falling from 94.0 to 92.2.

Unsurprisingly, the Business Climate Indexes for manufacturing and trade were particularly dire, with the services sector index also hitting reverse.

In spite of the negative bias, the downside for the EUR was tempered on the week.

The ECB monetary policy decision and press conference provided the EUR with support. Whilst the monetary policy statement talked of a willingness to ease policy further, Draghi’s views on the economy suggested a near-term hold.

Consumer consumption supported by strong labor market conditions, and wage growth left Draghi pinning back any expectations of a near-term rate cut.

Some market participants had anticipated some monetary policy easing on the day.

With the stats skewed to the negative, the EUR ended the week down by 0.83% to $1.1128 against the Dollar.

For the European major indexes, it was a bullish week for the majors, in spite of Draghi’s less dovish chatter and dire economic data.

The DAX30 rose by 1.3%, with the CAC40 gaining 1.04% for the week.

Elsewhere

It was a particular bearish week for the Aussie and Kiwi Dollars.

The Aussie Dollar slid by 1.86% to $0.6911, with the Kiwi Dollar down by 1.89% to $0.6636.

For the Aussie Dollar

There were no material stats in the week to provide the Aussie Dollar with direction. Market sentiment towards monetary policy and geopolitical risk provided direction on the week.

Expectations of a less aggressive rate cut by the FED ultimately weighed on the Aussie Dollar, which remains under pressure as the U.S – China trade war wages on.

News of the U.S and China resuming trade talks next week failed to provide the Aussie Dollar with support. A resolution to the trade war is unlikely to be forthcoming in the near-term.

For the Kiwi Dollar

Economic data was limited to June trade data, which provided little support to the Kiwi Dollar in spite of better than forecasted numbers.

Pressure from another shift in monetary policy divergence between the FED and RBNZ ultimately weighed on the Kiwi Dollar.

For the Loonie

It was a particularly quiet week.

Economic data was limited to wholesale sales figures. Wholesale sales slid by 1.8% in May, month-on-month, reversing a 1.7% rise from April.

Weak stats offset an upward trend in crude oil prices to leave the Loonie in the red for the week. Rising tensions in the Middle East failed to provide support, with sanctions on Iran already driving down Iran oil exports.

A willingness by the U.S visit Iran for talks, following a missile launch tempered fears of immediate U.S military action.

The Loonie ended the week down by 0.82% to C$1.3166 against the Greenback.

For the Japanese Yen

The stats were limited to Tokyo inflation numbers for July.

The annual rate of core inflation held steady at 0.9% in July. While better than forecast, the impact was muted as the markets expect further BoJ monetary policy easing down the road.

For the week, news of a resumption of U.S and China trade talks and a willingness by the U.S to open dialogue with Iran eased market jitters over the week.

For the week, the Japanese Yen fell by 0.90% to ¥108.68.

Out of China

There were no stats to provide direction on the week. The only good news was the planned resumption of talks this coming Monday…

It remains to be seen, however, whether the U.S and China can settle their differences over Huawei.