Last week had the potential to be pivotal and did not disappoint. The Summit between US President Trump and North Korean leader Kim Jong un made all the right headlines even if it was light on substance. Conversely, the trade war between the US and China ratcheted up a notch.
But ultimately it was the Federal Reserve and European Central Bank meetings which set the tone. The Fed turned up the dial on the possibility of it hiking rates two more times this year which gave the Dollar a second lease of life while the ECB failed to meet markets’ hawkish expectations and EUR/USD fell to as low as 1.155. Sterling continued to tread water against the currencies of the UK’s major trading partners, as did the Swiss Franc and New Zealand Dollar. The Australian Dollar was down about 1% on concerns over the implications of the US-China trade war and its potential impact on global trade.
US Dollar
The Dollar TWI was largely unchanged in the wake of the Trump-Kim Jong Summit in Singapore with markets seemingly underwhelmed by the signed agreement’s lack of details but came to life in the wake of the Fed policy meeting.
Markets had almost fully priced in the Fed’s 25bp rate hike and another 25bp hike before end-year. But following the upbeat tone of the updated macro forecasts and Chairperson Powell’s hawkish press conference markets now see a 50% probability that the Fed will hike twice more before end-2018. The Dollar, which had been inching higher on strong US data and concerns that a global trade war will hurt major economies more than the US, appreciated over 1% in the wake of the Fed meeting. Is now at its highest level since early May 2017.
Euro
The Euro had rallied to a multi-week high in the run-up to the ECB policy meeting but gave up all its gains and more after the ECB’s ultimately very conservative statement, updated forecasts and press conference by President Draghi. While the ECB announced, in line with expectations, that it would gradually phase out Quantitative Easing by end-year, it made this tapered ending of net bond purchases conditional on Eurozone inflation data rising in line with expectations. Moreover, the ECB said it would not be hiking rates until after June 2019, highlighting the recent weakening of Eurozone growth and uncertain outlook. Ultimately the Euro TWI is back in the middle of a narrow range in place since mid-April and markets are likely to re-focus on macro data in coming months.
Sterling
Sterling continues to trade water with the TWI broadly unchanged in recent weeks. Brexit noise has intensified as we approach the important European Council meeting on 28-29 June but Sterling may continue to flat-line until there is greater clarity as to the nature of a post-Brexit deal and as to whether UK macro data will allow the Bank of England to hike its policy rate in August.
Australian Dollar
The Dollar has ultimately struggled for direction since early May. While it has benefited from elevated global commodity prices and robust Chinese economic growth, it is being held back by expectations that the RBA will not hike rates until next year as well as concerns that a global trade would disproportionately impact open economies such as Australia’s.
