With little tier-1 macro data for markets to focus on last week, the onus was on central banks and officials and as always US President Trump to set the tone.
Sterling bounced higher after the Bank of England’s hawkish surprise at its policy meeting on Thursday but still ended the week broadly flat. It was a similar story for the Dollar which rallied mid-week only to give back these gains and more and the Kiwi also weakened a tad with markets seemingly unimpressed with the slight growth slowdown in Q1.
The Euro, which had weakened sharply in the wake of the ECB’s announced “dovish tapering” on 14th June, rebounded convincingly last week despite ECB President Draghi saying nothing really new last week and volatile German politics making the headlines. The Australian Dollar also made a very small gain despite clear signs that the central bank is no rush to even think about rate hikes.
Ultimately, however, the real winners were the Swiss Franc and Japanese Yen, the so-called “safe-haven” currencies. President Trump’s threat to escalate the United States’ trade war with China has rattled markets and intensified concerns that protectionist policies will weigh on global trade and growth.
US Dollar
The Dollar Trade Weighted Index appreciated in the early part of the week with markets still buoyed by the prospect of the Federal Reserve potentially hiking twice more this year. But the Dollar gave back all of its gains to end the week down 0.2% as Fed Chairperson Powell failed to bump up expectations that two hikes were more likely than one and the Philadelphia Fed manufacturing index for June came in below expectations.
While US macro data point to a decent rebound in US GDP growth in Q2, markets are ultimately looking for very strong numbers to vindicate their long USD-positions particularly as President’s Trump hard stance on import tariffs and other protectionist measures has raised the prospect of the US economy taking a hit further down the line.
Euro
The Euro’s resilience is proving impressive. The Euro had weakened sharply following the ECB policy meeting on 14th June, with the cautious policy statement and President Draghi’s press conference unsettling hawkish markets. But the Euro started to recover as early as 15th June and the TWI continued to grind higher throughout the week to end up 0.2% stronger. EUR/USD which had threatened to fall below 1.15 on 21st June ended the week at 1.614.
ECB President Draghi and other Board members simply reiterating the bank’s message at last week’s ECB Forum but markets took some comfort from the decent rebound in the Eurozone services PMI to 55.0 in June from 53.8 in May. Markets also seemingly ignored the tensions within the German ruling coalition and fact that Chancellor Merkel is clearly on the back foot over the increasingly divisive issue of immigration.
However, the composite manufacturing-services PMI did still fall sharply in Q2 from Q1 and points to a further slowdown in Eurozone year-on-year GDP growth in Q2 from 2.5% in Q1. The Euro, which remains at the strong end of a five-week range, may yet struggle to build on these gains until there is clearer evidence that Eurozone growth is stabilising and inflation will continue to rise.
Sterling
Sterling had been remarkably stable in recent weeks with little for markets to really sink their teeth in. It came to life however in the wake of the Bank of England’s policy meeting on 21st June as MPC Member Haldane joined two other hawks in voting for a 25bp hike.
While they were still outnumbered by the other siz MPC members, including Governor Carney, who voted for rates to remain unchanged at 0.50%, Haldane’s shift fuelled market expectations that the BoE will hike rates at its August policy meeting and in process lifted Sterling. The GBP/USD cross, which had threatened to slump below 1.31, jumped to 1.33 before stabilising around 1.3250.
The Sterling TWI nevertheless ended the week broadly flat and is now in the middle of a narrow one-month range. It could conceivably struggle for direction until there is further clarity on the BoE’s rate-hiking path and ultimately Brexit.
Swiss Franc
The Swiss National Bank which met on Thursday delivered few surprises, keeping its policy rate unchanged. The SNB flagged its concerns about the rise of buy-to-let investments, but the global backdrop of an escalating trade war between the US and its main trading partners is favouring so-called “safe-haven” assets and the Swiss Franc TWI appreciated 0.5% last week. Its gains have extended since Friday and it is now at its strongest level since early March. USD/CHF has fallen back below 0.99, having unwound the bulk of its post-Fed meeting gains.
Australian Dollar
The Australian Dollar had been under pressure in mid-June but made small gains last week following decent macro data. The Kiwi Dollar however weakened 0.2% last week with GDP growth of 0.5% qoq in Q1 – down from 0.6% in both of the previous two quarters – taking some of the shine off the Kiwi macro and currency story.
