· The dollar stood firm on Wednesday after upbeat U.S. data further tempered expectations of aggressive policy easing by the Federal Reserve later this month.
The struggling pound and euro also provided additional impetus to the U.S. currency.
· The dollar index against a basket of six major currencies was effectively unchanged at 97.365 after gaining 0.5% the previous day.
The dollar rose after stronger-than-expected June U.S. retail sales data dampened expectations that the Fed could cut interest rates by 50 basis points (bps) rather than 25 bps at its month-end policy review.
· “The strong U.S. data is a key driver behind the dollar’s latest gains, but weakness in European currencies, notably the pound and euro, is also playing a significant role as well, ” said Junichi Ishikawa, senior FX strategist at IG Securities.
· The pound retreated to a 27-month low of $1.2396 overnight as Boris Johnson and Jeremy Hunt, the two candidates to be Britain’s next prime minister, vied to outgun each other on taking a harder Brexit stance.
Sterling last traded little changed at $1.2411.
The euro was steady at $1.1212 after losing more than 0.4% the previous day.
· USD/JPY is currently trading near 108.15, having faced rejection at the 200-hour moving average of 108.33 earlier today. The JPY is bid, possibly due to losses in equities. Also, Fitch Ratings' affirmation of Japan's rating at 'A' buoys the Yen.
The USD/JPY pair has recovered up to the 50% retracement of its latest daily slide at 108.38 but remains within familiar levels. In the 4 hours chart, the pair has settled above all of its moving averages, which remain directionless and confined to a tight range, reflecting the lack of directional conviction. Technical indicators in the mentioned chart recovered up to their mid-lines, losing upward strength around them. The pair peaked last Friday at 108.60 the level to surpass to build a more solid bullish case in the upcoming sessions.
Support levels: 108.05 107.70 107.35
Resistance levels: 108.60 108.95 109.20
· Fed Chairman Jerome Powell, speaking in Paris on Tuesday, reiterated a pledge to “act as appropriate” to keep the U.S. economy humming.
Chicago Fed President Charles Evans, meanwhile, said on Tuesday that an interest rate cut of a half a percentage point at the U.S. central bank’s July 30-31 policy meeting could speed up achieving the Fed’s inflation goal.
· The U.S. economy is performing well but it’s not immune from external challenges that could affect its success, the acting managing director of the International Monetary Fund (IMF) told CNBC Tuesday.
“No matter how you cut it, the U.S. economy is doing well and it’s doing well at a time when global trade is very slow,” David Lipton told CNBC’s “Street Signs.” But he added that there “are many events in the world that could affect the U.S. economy and it makes sense to be vigilant to all of those.”
“We don’t have a recession in our baseline (scenario) but in light of the trade and technology tensions, in light of the financial markets, vulnerabilities are rising,” he added.
The IMF also noted how the tariffs had done little to address the bilateral trade balance and that in 2018, in fact, the trade deficit increased for the U.S. as imports from China rose. In its last World Economic Outlook report in April, the IMF projected global growth to slow from 3.6% in 2018 to 3.3% in 2019, before returning to 3.6% in 2020. The Fund then predicted 6.3% growth for China in 2019 and 2.3% growth for the U.S.
Lipton said that if a global recession occurred (although the IMF is not predicting one) then central banks and governments needed to be ready to react with the appropriate monetary and fiscal policy.
Lipton said he would not comment on any forthcoming central banking decision but attention is centered on the U.S. Federal Reserve’s monetary policy meeting and interest rate decision at the end of July.
· The U.S. and China have restarted their trade talks, but signs are showing a comprehensive deal could be a long way off, if it happens at all.
President Donald Trump said Tuesday that there’s still a long way to go to reach a deal with China, threatening to slap tariffs on another $325 billion of Chinese goods.
Meanwhile, China had suddenly added a new member to its negotiating team — the country’s commerce minister, Zhong Shan, who was present at last month’s G-20 summit and took part in a telephone conversation with U.S. representatives last week. Zhong is seen by many officials in Washington as a hard-liner, a sign Chinese leader Xi Jinping is standing firm, The Washington Post reported.
The prolonged trade battle seems to be taking a toll on the Chinese economy. Data on Monday showed its economic growth slowed to 6.2% in the second quarter — the weakest rate in at least 27 years.
Trump claimed the slower growth is evidence that China is losing the trade war, saying in a Twitter post Monday that the U.S. tariffs were having “a major effect” and it’s why China wants a deal.
· As China’s economic growth slows, some analysts say Beijing may return to some of its old policies — like building more infrastructure and easing property controls — and that could add to existing concerns about high levels of debt.
On Monday, the world’s second-largest economy reported growth of 6.2% for the second quarter. Even though official data from China is frequently questioned, the data marked the slowest year-on-year increase for a quarter in at least 27 years.
In addition to slowing global growth and trade tensions with the U.S., China faces many challenges domestically. Beijing has been trying to reduce the country’s reliance on debt for growth, spur consumption and improve the ability of privately-run companies to obtain financing.
But the decline in growth will require more stimulus by the end of the year, analysts predict. And they expect that support, some of which is already happening, will come in the form of more spending on infrastructure, and in turn, increased borrowing.
· China may have just signaled it’s going more hard-line on trade, but it could actually be a good thing, former top White House trade negotiator Clete Willems, told CNBC on Wednesday.
Beijing added a new member to its negotiating team last week: Commerce minister Zhong Shan, who’s seen by many officials in Washington as a hard-liner. It could be a sign that Chinese leader Xi Jinping is standing firm on trade, analysts say.
By adding Zhong to the negotiating team, it shows that Xi is trying to win over the hard-liners, said Willems, who left his role as deputy director of the National Economic Council (NEC) in March.
“China has now elevated its commerce minister Zhong Shan and made him a part of the core negotiating team along with (Vice Premier) Liu He. A lot of people are nervous — he’s seen as a hard-liner,” Willems told CNBC’s “Squawk Box.”
But he’s not overly concerned. “I actually think it’s a good thing because what it shows is that President Xi is trying to get buy-in from both the hard-line within China and the reformers, which is going to be necessary ingredients for a deal,” Willems said.
· The United States did not fully comply with a World Trade Organization ruling and could face Chinese sanctions if it does not remove certain tariffs that break WTO rules, the WTO’s appeals judges said in a ruling on Tuesday.
If China seeks to bring sanctions in the dispute, it would need to enter a new round of legal argument over the value of any damage to its trade.
· The United States and Japan are working on a trade deal involving agriculture and autos that could be agreed by President Donald Trump and Prime Minister Shinzo Abe when they meet in New York in September, three industry sources familiar with the discussions said on Tuesday.
· The United States will “do what it can do” to help defuse a worsening political and economic dispute between South Korea and Japan, a senior U.S. diplomat said on Wednesday, as South Korea warned that the row would have global repercussions.
· Oil prices rose on Wednesday after steep falls in the previous session, although U.S. crude trailed gains for international benchmark Brent after U.S. crude inventories fell less than expected.
West Texas Intermediate crude futures were up 6 cents at $57.68 by 0327 GMT, having fallen 3.3% on Tuesday.
Brent crude futures were up 25 cents at $64.60, or 0.4%. They ended down 3.2% in the previous session.
Crude inventories fell by 1.4 million barrels in the week to July 12 to 460 million, industry group the American Petroleum Institute (API) said on Tuesday. That compared with analysts’ expectations for a decrease of 2.7 million barrels.
Official data is due out later today from the U.S. government’s Energy Information Administration (EIA). If it confirms the fall it will be the fifth consecutive weekly decline, the longest stretch since the beginning of 2018.
Reference: Reuters, CNBC, FX Street
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