Strange FX reactions

28 July, 2015

The two day FOMC meeting starts today, but it seems a long shot to expect the Fed to signal an increase in rates at the subsequent meeting in September. Market pricing for a September move has decreased vs. where we were earlier in the month and the past few sessions have seen more doubt creep into the market, reflected in the weakening of the dollar over the past few sessions. China has played a part in this, with volatility continuing overnight, even though the main Shanghai composite index has ended the session little changed. For European stocks, this has seen the better tone gained in the wake of the Greece deal partially eroded, but the currency has performed relatively well. Underlying interest rate dynamics have helped here, but so has the greater focus on capital positions as investors become more nervous regarding the risks in China and surrounding the Fed this year. This can also been seen in the continued underperformance of emerging market currencies, down a further 3% this month (JP Morgan index) and down 8% so far this year. Overall, whilst stocks and China would suggest we are in a risk averse environment, the performance of major currencies via a weaker CHF, stronger Aussie and limited yen weakness continues to suggest otherwise.

For today, GDP data in the UK is seen at 08:30 GMT, where 0.7% QoQ gain in the headline index is anticipated. We also seen house price data in the US at 13:00 GMT, together with consumer confidence at 14:00 GMT. Sterling would naturally be disappointed should growth fall short of this number, undermining BoE Governor Carney’s recent indications that rates could rise around the turn of the year.


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