Bulldog on the leash: The only major currency to rise against the US dollar this year is…the pound! Sterling hit a fresh year-high above $1.30 on slightly warmer-than-expected inflation data. UK CPI remained at the Bank of England target of 2 per cent versus 1.9 per cent expected and services inflation remained at 5.7 per cent...enough to justify a cut next month? Traders say no and pared bets on an August cut down to 25 per cent, in line with the comments from Monetary Policy Committee members Jonathan Haskel and Huw Pill, who recently indicated they would hold fire for now. Two per cent is fine, the main concern will be the stickiness of services inflation at this stage.
Gilt yields rose, with the two-year rising 4 basis points to go above 4 per cent, which has helped put a bit of a bid into sterling. The inflation data supports a stronger pound narrative at this stage. A breach at $1.30 this morning could then see the stage set for a run to the July 2023 high at 1.31. Now it’s back to looking like the Federal Reserve could cut rates ahead of the BoE, which should offer some near-term support for sterling. I fear that the BoE is being too cautious here. Nevertheless, if we see this move in sterling sustained we should consider a new trading range for the pound between $1.30 and $1.40. We should not discount the effects of the politics on this – as discussed before the new government introduces, for now, in the eyes of investors at least – a degree more clarity and consistency in terms of policymaking.
There is a reset and people are looking at the UK with fresh eyes. The economy seems to be moving in the right direction and we are handling higher rates a lot better than expected despite the relatively strong transmission of monetary policy compared with the US. That strong transmission should work in our favour when the BoE does cut…maybe the Bank is mindful that there is a lot of pent-up energy in the old bulldog yet and it’s being careful about unleashing it.
After all of that, stocks were a bit tepid early doors in Europe despite ongoing moves in the US. The rotation continues with the Dow posting a thumping 1.85 per cent daily gain for its best day in a year, closing at a fresh record high. Small caps continued to roar with the Russell 2,000 rallying 3 per cent for a fifth day of gains – now up 12 per cent in the last month. But the FTSE 100 hasn’t caught any of the optimism and is down 0.2 per cent this morning, possibly more influenced by delayed rate cuts. It’s a similar story on the mainland, however, with the Dax down 0.16 per cent and the Cac 0.25 per cent.
Now to US presidential hopeful Donald Trump...and some market-moving headlines – we need to reacquaint ourselves with Trump’s ability to make stocks move with a few comments. Shares of TSMC fell after Trump said: “Taiwan should pay us for defence, we're no different than an insurance company”. Asian shares were a bit mixed overnight with losses focused on China/Taiwan tech, unsurprisingly.
Trump said about Powell as Fed Chair “I would let him serve [his term] out, especially if I thought he was doing the right thing”. What does he mean by ‘doing the right thing’? We know exactly what this means...cutting rates! This asks a bigger question: Does Trump run down the dollar?
What does Vance as vice president signal about the Trump agenda? We have to look to trade – tariffs, protectionism and maybe devaluing the dollar. You need to look at what they have been saying forever – globalisation killed American jobs, trading with China is fundamentally flawed...the goal is to reinvigorate places like rust-belt Ohio and the Appalachians by bringing back jobs. It would hurt China for sure. UBS notes that new tariffs of 60 per cent on all Chinese exports to the US would more than halve China’s annual growth rate.
The Trader is written by Neil Wilson, chief market analyst at Finalto
