Pound rallies despite Carney's warnings

Dollar Pares Some Losses Post CPI Data: Jay Powell Up Next

The focus on central banks ramped up on Thursday, with input from Mark Carney, ECB minutes from the latest policy meeting and a second appearance from Fed Chair Jay Powell on Capitol Hill. Dollar traders were also digesting a slew of better than expected US macro releases, which has helped to soften the blow on the dollar ahead of Jay Powell taking the stand.

A dovish Jay Powell in the previous session cemented market expectations for a Fed rate cut in July. The question is now not if the Fed will cut, but how deep will they go. The CME FedWatch tool showed an increase in expectations for a much deeper 50 basis point cut following Jay Powell's appearance. We still think that the Fed won't go that far. A 50 basis point cut is sending out the wrong message; one of panic rather than insurance.

Furthermore, given that inflation increased ahead of forecast on a monthly basis and core inflation ticked up above the 2% target in June, a 25 basis point cut is broadly being considered more than adequate.

The dollar extended losses in early trade and has stabilised following the inflation reading. Investors will turn their attention back to Powell for his second session this afternoon. Will he try to row back some of the damage done? This wouldn't be completely unheard of, Powell employed a similar tactic the last time he appeared before Congress.

Euro pares gains on dovish ECB minutes

The euro was unable to take advantage of the weaker dollar, owing to dovish calls sounding from the ECB nest. The minutes from the latest ECB Governing Council meeting showed that the ECB stands ready to unleash stimulus measures should it be required, amid heightened uncertainty over the health of the eurozone economy. Needless to say, the euro pared earlier gains.

Pound rallies despite Carney's warnings

And then there was the pound. The pound capitalised on the weakness of both the euro and the US dollar, extending gains versus its peers. Clearly the case of "best of a bad bunch". Whilst the ECB and the Fed are poised to cut imminently, the BoE still has time on its side ahead of a potential no deal Brexit come 31st October. Despite warnings from Carney over the damage of a no deal Brexit, the pound pushed to a high of $1.2571.

After spending the morning in positive territory, the FTSE weighed down into the red, struggling under the stronger pound. A stronger start on Wall Street and a cautiously strengthening dollar could see the UK index close on higher ground for the first time in a week.