Brexit: New round of negotiations

Once again, the dollar lost some ground against major currencies such as the euro, the Swiss franc or the Japanese yen. In fact, against the euro and the franc, it traded at its lower level of the year in August. The market is awaiting the minutes of the last meeting Federal Open Market Committee today. The euro could hit new highs and test the $1.2000 mark if the Fed’s minutes were to be dovish enough to set the stage for new actions, which is what many analysts are anticipating. In addition, the greenback is still suffering from the transition between the closure and the reopening of the economy after the lockdown in several US states. The unexpected rise in consumer prices, excluding food and energy, in July (+0.6% over one month against +0.3% expected), from 1.2% to 1.6% over one year, is rather reassuring for the markets, thus removing the risk of deflation. At this level, inflation is still well below the Federal Reserve’s target of 2%. The central bank therefore has a free hand to resort to other stimulus measures if necessary during the next FOMC in September. Some other economic data is also more reassuring, such as retail sales, which rose 1.2% in July after a jump of 8.4% in June. On a YoY basis, they are up 2.7%, having exceeded their February level. This indicates a continued recovery in household consumption after the sudden drop linked to the lockdown. Everything remains open for the Fed meeting of September 16 and the minutes of the last meeting published this evening could uncover a trend.

A new round of negotiations began yesterday between the United Kingdom and the European Union at a time when there are still seven weeks to try to find a start of an agreement, and even after talks have remained unsuccessful since March. The UK experienced a 22.1% drop in its economy in the first half of 2020 – more than double the decline in the United States and far more than in the main European countries except Spain, following the prolonged lockdown. An agreement with the EU is, therefore, is crucial for London so as not to subject the economy to another shock. In the meantime, the British currency is on the spot against the euro and the franc but is advancing against the greenback.

Since the start of the year, the Swiss franc has largely limited any damage. The uncertainties linked to the pandemic, the plunge in activity in the first half of the year and the sudden correction in the stock markets until mid-March had put it under very high pressure. If the franc has not strengthened further – and even retreated – since the height of the crisis, it is thanks to interventions by the SNB at an even greater scale than when the floor price was abandoned. And the institution is not lowering its guard even as the euro seems well established above 1.0700 as shown by the increase in demand deposits (+2.8 billion) for the ninth consecutive week. A breakout and close above the 1.0840 technical point is now needed to open the door for our currency to weaken further towards 1.1000.

In Australia, RBA Governor Philip Lowe expressed confidence that rates would stay at 0.25% for the next three years. Although a level of 0.10% could be envisaged, it still excludes that the rates can dip into negative territory.

The Central Bank of Mexico made the tenth consecutive cut in its key rate, reducing it from half a percent to 4.5%, a measure dictated by the economic contraction, while the Central Bank of Brazil lowered its rate to 2% earlier this month. This is the ninth consecutive reduction in this rate and the Bank is not ruling out the possibility of lowering it further in the future depending on the impact that the pandemic will have on the largest economy in Latin America.

After a new all-time high on gold at $2,075, the ounce experienced a wave of profit-taking which dropped the price below $1,900 last Wednesday. The yellow metal has now resumed its forward march and is once again around $2,000. The US bank Citi believes it will hit $2,300 within a horizon of six to twelve months. The first resistance zone, which accumulates several technical points, is at 2,070/2,088 dollars.