There hasn’t been a great deal of major scheduled economic data releases this week, and on Monday and Tuesday the market was (maybe unsurprisingly) quiet. The action picked up considerably yesterday, with the U.S. Dollar gaining against all the other major currencies, especially the Euro and the New Zealand Dollar. Action has been more mixed today, with the U.S. Dollar remaining largely unchanged, while the Euro rose, and the British Pound continued to fall. This continued even after today’s major data release came out shortly before the New York open – U.S. GDP was expected to come in at a growth rate of 2.2%, but in fact it fell a little short, coming in at 2%. Why would such a major release in an otherwise mostly empty economic calendar have such minor effect?
I think the reason is that there is another factor which is dominating the market, and when that happens, news that is usually considered major can pass by relatively unnoticed. The dominant factor is the brewing trade war, which is spooking stock markets, and this in turn causes knock-on flows in the currency market. The “risk off” flow typically sees a strengthening of the U.S Dollar and Japanese Yen, and this is pretty much what we have been seeing over the past day or so.
The U.S. stock market looks alarming, having made a bearish “U” pattern which continues to descend and make new lows day by day. At the time of writing, the S&P 500 Index is barely 20 points off its 200-day moving average, a key metric for determining whether stocks are in a bull or bear market.
The final obvious anomaly is the British Pound, which is considerably weaker than the Euro today. The proximate cause is likely to be an increasing focus on the lack of success in Brexit negotiations as the European Union begins a summit meeting today.