The Dollar trade-weighted index weakened 0.2% last week but has since recovered this modest loss. The Federal Reserve kept its policy rate unchanged, as expected. Late on Sunday US President Trump said that trade negotiations between the US and China had stalled and that he would consider hiking tariffs on $200bn of Chinese imports to 25% from 10% as early as Friday. The S&P 500, which has been range-bound in the past fortnight, weakened 0.5% on Friday.
The GBP/USD cross, which early last week had dipped below 1.29, is back above 1.31. The Bank of England’s warning that modest rate hikes may be appropriate in the event of an orderly Brexit and reports that Prime Minister May is willing to compromise with the opposition Labour Party in order to get a Brexit deal through parliament have contributed to Sterling’s slow recovery.
EUR/USD remained choppy around the 1.12 level last week and was broadly unchanged in trade-weighted terms, thanks in part to decent Eurozone macro data. GDP growth accelerated to 0.4% qoq in Q1 from 0.2% qoq in Q2 (based on preliminary data), beating the consensus forecast of 0.3% qoq. Similarly, core CPI-inflation rose to 1.2% yoy in April – the high since August 2017 – from 0.8% yoy in March and versus a consensus forecast of 1.0% yoy. Moreover, final data out yesterday saw the composite PMI for April revised upwards to 51.5 from 51.3. While growth and inflation in the eurozone (including in Germany) remains modest, these data may for now be enough to quell expectations that the ECB may have to consider further monetary policy easing measures.
The Australian Dollar had weakened to below 0.70 against the US Dollar yesterday for the first time since 2nd January, with markets pricing in a 50/50 chance of the Reserve Bank of Australia cutting rates at its policy meeting today. But the RBA stood firm, keeping its policy rate unchanged at 1.50%. While the tone of its statement was somewhat bearish, markets have cut their pricing of RBA rate cuts for the next 12 months to 43bp from 50bp and AUD/USD has rebounded back to 0.703.
