Attention in the currency markets this week will turn back to monetary policy, with a number of major announcements from both sides of the Atlantic under the microscope.
We have argued for a while, however, that macroeconomic conditions globally are not necessarily conducive of an aggressive pace of rate cuts. In order to convey this, we have constructed the below index that aims to give a broad gauge of macroeconomic conditions in both the US and the Euro Area. The index, which equally weights US nonfarm payrolls, the US ISM non-manufacturing PMI, German unemployment and Eurozone retail sales, has declined modestly since the beginning of the year, although has clearly not shown any signs whatsoever of trending towards recessionary levels.
Figure 1: Ebury’s US-EZ Economic Performance Index (1999 – 2019) [1999=100]
While these are largely lagging indicators that do not necessarily give the best idea regarding the possibility of a pending slowdown, they do show that economic conditions are currently holding up well, with much of the need for rate cuts instead driven largely by trade uncertainty.
In the markets on Monday, sterling fell to its lowest level in three weeks amid lingering concerns regarding a ‘no deal’ Brexit. While investors have grown increasingly confident that the Brexit deadline will be delayed, comments from Boris Johnson that the UK will leave the bloc come what may at the end of the month have got the market jittery. Meanwhile, EUR/USD continues to trade just below the 1.10 level, with investors awaiting news later in the week. Aside from monetary policy, trade talks will resume between the US and China. Any signs of progress will be good news for those higher risk currencies, with the New Zealand dollar already one of the better performing majors.