The dollar reached 13 month lows yesterday after deepening political uncertainty in the US and doubts over whether the Fed will raise interest rates for the third time this year.
The firing of recently promoted communications chief Anthony Scaramucci has given markets yet further reason to suspect serious divisions within the Trump administration. This in turn has led investors to question whether the administration will be able to stick to its plans for cutting corporate taxes and boosting spending on infrastructure within the US, which has weighed in on USD.
At the same time, slower than expected inflation has caused jitters among some FOMC members who remain half-hearted over hiking rates. With inflation still below the central bank’s 2% target, markets remain in doubt over whether the Fed will be able to stick to its monetary tightening path for the rest of this year.
Although the Fed’s gradual policy tightening has provided strength to USD over the past two years, the prospect that other major central banks such as the ECB and the Bank of England may join the Fed in normalizing monetary policy has caused the dollar to lose momentum.
Data yesterday also showed a minor slowdown in US manufacturing activity for the month of July. The ISM index which measures national factory activity fell from an almost three year peak of 57.8 in June to 56.3 after a drop in new orders. In addition, consumer spending showed little improvement from the previous month which has set the US economy on a neutral growth path for the rest of this quarter.
Sterling held its ground against the dollar yesterday after data showed a stronger than expected rebound in UK factory growth on the back of a rise in new exports.
The manufacturing PMI rose to 55.1 up from a reading of 54.2 for the month of June. Analysts had originally forecast the figure to come out at 54.4.
The positive figure follows from higher foreign demand for goods produced in the UK, which has risen by the fastest rate since the second quarter of 2010. The new data has boosted optimism over the expected performance UK economy at the start of the new quarter.
09:30 - GBP: Construction PMI; Forecast at 54.2 from a previous of 54.8
13:15-USD: ADP Non-Farm Employment Change; Forecast at 187K from a previous of 158K
15:30-USD: Crude Oil Inventories