Easing trade tensions, strong US inflation lift dollar

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14 August 2019


The EUR/USD rate was driven back below the 1.12 level for much of London trading yesterday, with the dollar buoyed by some encouraging headlines out of US-China trade talks and resilient US inflation numbers.

recent slowdown in inflation has been one of the primary reasons why the Federal Reserve cut interest rates at its most recent meeting in July and why the market is currently pricing in an additional two cuts during the remainder of the year. Yet with the main headline measure of consumer price growth now back around the 2% target, we think that two full 25 basis point cuts during the remainder of 2019 may be slightly excessive.

The main headline measure of US inflation came in at 1.8% year-on-year in July, up from the 1.6% registered a month previous. Even more noteworthy, the level of core inflation, which strips out volatile priced products, is back up at 2.3%, comfortably above the Fed’s 2% target level. While uncertainty surrounding the US-China trade war is undoubtedly a concern for policymakers, core inflation above target and a labour market that is still creating jobs at a healthy pace are not conducive of an aggressive pace of monetary easing, in our view.

We even saw some encouraging news on the trade front yesterday, with the Trump administration saying it would delay the implementation of 10% tariffs on some Chinese goods, set to taken effect 1st September. While this far from guarantees a trade deal, it is a step in the right direction. Macroeconomic data out of the US is fairly light on the ground today, so much of the attention among EUR/USD traders will be on this morning’s revised Eurozone GDP numbers. Investors are eyeing unrevised quarter growth of 0.2%.

UK wage growth rises to highest level in over a decade

Sterling was little moved during the course of trading yesterday, despite a fairly solid set of UK labour data.

Yesterday’s jobs report out of the UK was pretty encouraging, continuing to suggest that domestic labour market is providing resilient to the uncertainty created by Brexit. While there was a modest uptick in unemployment to 3.9% from 3.8%, earnings growth continues to rise at a pace that far outstrips inflation. Earnings excluding bonuses rose by 3.9% yearly in the three months to June, better than the 3.8% priced in and its fastest pace in over ten years.

With inflation now around 2%, real wages are growing at approximately 2% year-on-year. This is a very solid by recent standards and should, we think, filter its way through to an improvement in UK consumer activity in the coming quarters. Next up for the pound will be updated inflation numbers out at 9:30am UK time.