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Global Market Watch - 23rd August 2019

The British pound jumped more than half a cent yesterday to a nearly one-month high after German Chancellor Angela Merkel said a solution to the Irish border issue could be found before the October 31 deadline. This suggests that the market is short on sterling as such market rhetoric is able to shift the market almost 1.5% on the day. This is especially true when considering Macron’s more negative comments which did not seem to have too much of a detrimental impact on the currency. Watch out for any sign of a breakthrough in Britain’s efforts to convince the EU to renegotiate the deal as it is likely to send the pound jumping.

In the Eurozone, Italian politics in the main focus. The Italian president is giving the parties until Tuesday to find a new government. Not surprisingly, League Leader and Interior Minister, Salvini, is looking for a snap election, while the 5 Star Movement Party is exploring the possibility of a coalition with the PD’s Renzi (Italy’s Democratic Party). So far, the market is looking for a positive outcome as spreads are tightening. We also have the Group of Seven summit in France from Saturday which could rattle the currencies. The European Union hopes to ease tensions with the United States to avoid punitive tariffs on EU autos.

From a US perspective, markets will continue to focus on the Jackson Hole conference and especially Powell’s speech at 3pm UK time. The FOMC minutes from Wednesday showed a highly divided Fed on the question of rate cuts. That being said, expectations that the Fed will cut rates at its next meeting in September are still very high, according to interest rate futures. However, the currency market is likely to react if the tone of Powell’s comments does not match these dovish expectations. The divided Fed coupled with the surprisingly weak US flash PMIs yesterday, has generally failed to move the USD in either direction. The market seems settled on the Fed ‘only’ delivering a 25bp cut at the September meeting and if Powell aims at finding a middle ground in a divided Fed, his speech today should not be a market mover. In the bigger picture, it will be interesting to see if yesterday’s US PMIs marked the beginning of a renewed string of weaker US data. That could open up a renewed drop in USD rates and USD FX spot prices.

The NZD has been a big mover today, jumping from a three and-a-half-year low after the Pacific nation’s central bank chief said he was “pleased” with where interest rates were, hosing down expectations of more immediate rate cuts to follow this month’s aggressive easing. There has also been concern about whether China’s economy is growing because U.S. tariffs, on roughly $150 billion of Chinese goods, will take effect from September 1, about half the value of imports that President Donald Trump had previously threatened duties on. Trump has now set a December 15 deadline for imposing tariffs on the remainder of Chinese goods imported by the United States.

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