Forex today: Markets get set for Federal Reserve related noise

• US Secretary of State Pompeo was again playing the hawk.
• President Trump tweeted, again, that he wasn’t ready to do a deal with China.
• US 2-year Treasury yields dropped  from 1.52% to 1.49%.

Forex today was mixed, with a firm S&P, lower yields, lower Dollar but a higher euro despite Italian risks. We might have expected a bigger impact on the FX space following the resignation fo  Italy’s prime minister, however, the euro retained a bid and the Dollar fell over from the 98.50s to a low of 98.12 despite President Trump confirming  media reports that he was  considering fiscal stimulus.

US 2-year Treasury yields dropped  from 1.52% to 1.49% then back to 1.51%, the 10-year yield from 1.59% to 1.55%. A flight to bonds is keeping yields on the backfoot which, at times, is denting the Dollar’s progress. Indeed, the market’s consensus is still for a rate cut as soon as September.  

In other news, there were some upbeat notions in the Brexit saga with Merkle seeking to find some way to resolve the backstop, looking  for  practical solutions: “Britain needs to decide which way it goes, we have made our offer to work closely,” Merkel noted saying  that it is a question of the political declaration on future ties, not of the Withdrawal Agreement. This followed yesterday’s news that UK PM Johnson had written a letter to EU stating that he wished to renegotiate the Irish “backstop” that he sees as unworkable. However, the Irish responded that it was not for negotiation and then EC’s Tusk responded in a similar fashion. Regardless, GBP/USD rallied on Merkle’s  statements.  

US Secretary of State Pompeo was again playing the hawk over China in  an interview with CNBC saying that Huawei Technologies Co. and other Chinese companies are a  national security threat and to top it off, President Trump tweeted, again, that he wasn’t ready to do a deal with China – yet markets are taking it in their stride, immune to Trump shooting from the hip.  

Currency action

Analysts at Westpac summed up the currency action as follows:

• “EUR/USD rose from 1.1070 to 1.1105 – “Italy’s PM Conte, in the face of Salvini’s revolt and call for a no-confidence vote, announced in Parliament that he would resign to President Mattarella. It is not at all clear what happens next but Italian bond markets took an optimistic view, the 10-year bond yield falling 6bp while other Eurozone bonds rallied 3-4bp.”
• USD/JPY followed US Treasury yields down from 106.60 to 106.20.
• AUD/USD ranged between 0.6770 and 0.6795.
• NZD ranged between 0.6405 and 0.6430.
• AUD/NZD initially nudged up to a two-month high of 1.0583 before retracing to 1.0552. The GDT dairy auction resulted in little change in prices overall (-0.2%), with whole milk powder up 2.1%, skim down 0.3%, and butter down 3.4%.”

Key notes from Wall Street:

• Wall Street ends in the red, DJIA testing back below the 26000s

Key events ahead:

The Jackson Hole and EZ PMIs at the end of the week will take up thekey   focus, but for the meantime, we have the minutes from the FOMC’s 30-31 July meeting.