• Biden’s Potential Withdrawal: Investors reacted positively to Vice President Kamala Harris’s endorsement, with stock futures and Treasury futures rising, while online betting on Harris increased.
• USD Speculators’ Position: US dollar futures saw a net long position near a six-month high, with markets anticipating a potential Trump victory following an assassination attempt and Biden’s possible withdrawal.
• Fed’s Rate Decision: Political pressure on the Fed to maintain rates could impact the USD positively in the long term, especially if Trump’s trade policies and fiscal expansion influence growth and yields.
• GBP Strengthening: The Pound gained from favorable yield spreads and diminishing expectations of a Bank of England rate cut, with GBP/USD hitting a 12-month high.
• ECB’s Data-Dependent Approach: The ECB maintained a cautious stance with no forward guidance, emphasizing data dependency for future rate cuts, hoping for better inflation figures to justify the June decision.

USD: Investors were ready for President Biden’s potential withdrawal from the race for the Democratic nomination, reacting positively to Vice President Kamala Harris’s endorsement. The markets responded with S&P 500 stock futures rising 0.1% and Nasdaq futures increasing 0.2%. Futures for 10-year Treasuries also rose, while 10-year bond yields fell by 1 basis point to 4.23%. EUROSTOXX 50 and FTSE futures both saw a 0.2% rise. “Some polls show Harris outperforming Biden against Trump, and Democrats are hopeful that upcoming polls will reflect a Harris-led surge,” said ANZ analysts. Online betting site PredictIT showed a drop in bets on Trump’s victory by 4 cents to 60 cents, while Harris’s chances increased by 12 cents to 39 cents.

Large currency market speculators in US dollar futures have increased their net long positions to near a six-month high, according to the latest Commitment of Traders (COT) data from the Commodity Futures Trading Commission (CFTC). The non-commercial futures contracts of the US dollar index, traded by large speculators and hedge funds, totaled a net position of 18,550 contracts as of July 16, 2024, marking a weekly increase of 2,342 net long contracts.

Markets perceived an increased likelihood of Trump’s election victory after he survived an assassination attempt, adding pressure on President Biden to withdraw from the nomination race. Trump urged the Federal Reserve not to cut interest rates in September. Commerzbank commented on the potential impacts of political pressure on monetary policy: “If the Fed lowers the key interest rate in September, it could be seen as a USD-negative signal. However, it would also indicate the Fed’s resistance to political pressure, which could be USD-positive in the long term, especially over the next four Trump years.”

Credit Agricole noted the possibility of a dollar rebound if expectations are not met: “Any potential reality check could lend the USD support, particularly as seasonality becomes more favorable in August.” Citigroup expects a Trump victory in November to boost the dollar due to trade policies, tariffs, and a more expansionary fiscal policy leading to stronger growth and higher yields. They added: “We do not expect markets to actively trade the election until August/September. A ‘red wave’ scenario could boost the DXY by 5%, with markets fully pricing this outcome by the election itself. Consequently, the USD rally might peak around the election, with limited upside even if a ‘red wave’ materializes.”

GBP: The Pound gained support from a shift in yield spreads favoring the UK currency. The likelihood of an August rate cut by the Bank of England diminished, while confidence in a September move by the Fed grew. The Pound to Dollar (GBP/USD) exchange rate reached a 12-month high above 1.30 before correcting to 1.2920. Bank of America suggested that a sustained move above 1.29 for GBP/USD could lead to a medium-term advance to 1.40. Danske Bank revised its Pound forecasts higher but still predicted a decline to 1.21 on a 12-month view.

Headline UK inflation remained at 2.0% for June, against expectations of a slight drop to 1.9%, while the core rate stayed at 3.5%. The services sector rate remained at 5.7%, well above the Bank of England’s comfort zone. Markets now price in less than a 50% chance of an August rate cut by the Bank of England. HSBC commented: “If the central bank keeps rates unchanged in August, it should be GBP positive. However, over the medium term, the relatively poor growth-inflation mix in the UK compared to the US should favor the USD.”

ECB: Last week’s ECB meeting did not result in any policy changes following the June rate cut, with minimal changes in communication. The key takeaway was the lack of forward guidance, with future cuts dependent on upcoming data. “For once, the ECB really seems to be sticking to the plan not to give any forward guidance. And rightly so. Lagarde’s emphasis on data dependency and a meeting-by-meeting approach confirms that there is no preset plan for the September meeting,” noted ING.

The data remains inconclusive. Inflation is still high, and wage growth too robust to relax into a normal easing cycle with multiple cuts. Conversely, the EU economy remains weak, and a prolonged period without further cuts might suggest the June cut was premature: “The ECB won’t want the June cut to look like a policy mistake over the coming weeks, which could strongly favor another rate cut in September,” ING added. The ECB is likely hoping for improved inflation figures to justify further cuts and validate the June decision.