Stock futures are up and the dollar is trading on a stronger footing after President Donald Trump said he would announce a “full and comprehensive” trade agreement with the United Kingdom later this morning, raising hopes that a broader ratcheting down in tensions could avert lasting damage to the American and global economies. The Canadian dollar and Japanese yen are trading lower, while the euro and other majors are holding firm.
Currency market reaction during the White House press conference itself could be fairly subdued. Although reports have suggested that the US is prepared to rescind taxes on autos along with steel and aluminum products – and the UK might reduce its digital services and agricultural levies – the “deal” may resemble a memorandum of understanding more than a full-fledged trade agreement, and the administration’s 10-percent “baseline” tariff could remain intact. Goods movement between the UK and US is relatively modest, particularly when set against the overall American trade balance.
The Bank of England earlier surprised investors with a slightly-hawkish three-way split in its latest rate decision. The Monetary Policy Committee voted by a closely-balanced five-to-four margin to cut its policy rate to 4.25 percent from 4.5 percent, with two members favouring a 50 basis-point cut – as had been expected – while another two opted to stay on hold. Officials noted “substantial progress on disinflation” and downgraded price growth expectations across a three-year forecast horizon, but also revised their growth projections slightly higher and left several key bits of statement language intact, suggesting that the pace of rate reductions is unlikely to accelerate. “A gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate,” they said, “monetary policy will need to continue to remain restrictive for sufficiently long,” until the risks facing inflation’s return to target have “dissipated further”.
Yesterday’s Federal Reserve announcement was a snoozer. As had been widely expected, policymakers kept rates on hold, and in the statement laying out the decision said “uncertainty about the economic outlook has increased further,” before noting that “the risks of higher unemployment and higher inflation have risen”.
In the press conference following the announcement, chair Jerome Powell sounded slightly more hawkish than markets had anticipated. If tariffs remain in place, the likely outcome will be “a rise in inflation, a slowdown in economic growth and a rise in unemployment,” he said, but “We think we’re in the right place to wait and see how things evolve. We don’t feel like we need to be in a hurry. We feel like it’s appropriate to be patient … Until we know more about how this is going to settle out, and the economic implications for employment, inflation, I couldn’t confidently say I know what the appropriate path will be”. Markets are putting 20-percent odds on a rate cut at the central bank’s June meeting – down from 30 percent yesterday morning and 50 percent a week ago.
Ructions in Asian foreign exchange markets seem to be calming after generating hyperbolic headlines earlier in the week. The Taiwanese dollar soared in value against the greenback late last week on concern that a trade deal with the US might contain a demand for an upward reset in the exchange rate – Taipei has been orchestrating a stealth intervention campaign for years – which would generate massive losses for onshore investors with long-dollar positions (most importantly, life insurance companies). Currency strategists then responded with warnings of a potential dollar “avalanche” as Asian countries attempted to front-run similar demands by selling dollar assets, but officials on both sides have since denied that any exchange rate requirements had been tabled, and the Taiwanese central bank has said it was not responsible for the move. We suspect that the episode does foreshadow a change in trading behaviour – real-money investors are now likely to incorporate a more cautious view on dollar-denomination risks, and will almost certainly raise hedge ratios going forward – but few are likely to crystallise losses by dumping greenback assets into markets in the near term. Further retracement seems likely.
