Headlines

*Chipmakers revive stocks as euro struggles after freefall

*Sterling rises after reports PM Johnson will resign amid political chaos

*Crude fluctuates either side of $100 on tight supplies and demand worries

*US ISM services eased less than expected, activity subindices suggest decent growth

USD advanced to multi-year highs again, posting a top at 107.26. The dollar index, which measures the US currency against a basket of six others tends to strengthen during times of uncertainty. EUR fell to another new low at 1.0161, below 1.02 for the first time in two decades. GBP also dropped to a fresh cycle low at 1.1875 before bouncing back near 1.20. Domestic political uncertainty has been hurting sterling amid a subdued risk tone. USD/JPY continues to track sideways while USD/CAD again touched resistance at 1.13176 before pulling back.

US equity futures are modestly in the green. The benchmark S&P500 index dipped in the immediate aftermath of the release of the FOMC minutes last night. But it then jumped as much as 1% before closing 0.36% higher. The tech-heavy Nasdaq also closed up, 0.62% higher. European equity indices are up over 1% with the Eurostoxx 600 gaining nearly 1.5%. It is still down over 15% from its record high six months ago.

Market Thoughts – FOMC minutes highlights inflation concerns

The Fed’s most recent minutes warned that the central bank could move to a “more restrictive” monetary policy to fight inflation. That means taking rates above 2.5%, with few concerns about risks to growth. Last month, the FOMC raised its benchmark rate by 0.75%, the largest increase in almost 30 years, to tame price rises. Policymakers were worried that inflation “could become entrenched” if the public began to question the resolve of the committee”.

Continued Fed tightening amid a global economic slowdown remains a positive environment for the greenback. Research shows that dollar peaks correlated with the exact days of lows for the S&P500 in 2009 and 2020. More dollar strengthening tells us to expect further US stock market volatility.

Chart of the Day – GBP and political turmoil

Sterling has been weak recently in line with the other major currencies mood against the USD. The risk tone has been muted as markets assess the mutual interference between growth and inflation concerns. But news that PM Johnson will resign has seen a bid in the pound. This is after the UK’s currency was seemingly unfazed by the political volatility going on this week. A change in leadership could possibly prompt some earlier fiscal stimulus than had been expected.

Going forward, GBP should continue to track its peers and the risk tone. It remains especially vulnerable to a weakening economy and elevated energy prices crimping consumer activity. Overextended BoE bets may risk further losses too. Prices are currently trading above the mid-June low at 1.1933. If we take out yesterday’s low at 1.1875, big figures offer next support towards the Covid-low in 2020 of 1.1412. Only a move above the May low at 1.2155 slows the long-term downtrend.