The Dollar, Australian Dollar and Swiss Franc were broadly unchanged against one another last week while the Euro, Sterling and New Zealand Dollar weakened.
US Dollar
Robust US macro data seemingly supporting market expectations that the Federal Reserve may well hike rates twice more before end-year and putting a floor under the Dollar. US President Trump was a little more circumspect last week but the trade war between the US and China shows no sign of abating with both sides threatening to up import tariffs.
Euro
EUR/USD fell to as low as 1.155 towards the end of last week. Eurozone growth remained modest in Q2 at about 0.4% quarter-on-quarter and did not really pick up much in July while at the same time inflationary pressures remain modest. With this background the European Central Bank is likely to remain cautious in its outlook for policy rate hikes which will likely continue to disappoint Euro-bulls.
Sterling
The Bank of England delivered only its second 25bp rate hike in a decade and yet Sterling weakened in the wake of the decision and Governor Carney’s press conference, with GBP/USD below 1.30 for the first time since 20 July. Markets had admittedly already priced in 23bp of hikes so the scope for a Sterling rally was always going to be limited. Moreover, Carney was rather downbeat on Brexit and its likely impact on the British economy and there was no clear suggestion that the Bank of England would look to hike rates again before end-year. This was for all intents and purposes a “dovish-hike”. Hawkish Monetary Policy Council member McCafferty will step down on 1st September and his replacement, Professor Haskel, will likely be less hawkish, further reducing the odds of the Bank of England hiking rates to 1.0% before year-end.
Australian and New Zealand Dollar
The Australian and New Zealand Dollar had mixed fortunes last week with the Australian Dollar outperforming its antipodean cousin and AUD/NZD appreciating to just short of 1.10 – an important resistance level (since late-January) for the cross. Economic activity in Australia appears to have picked up in June, with building approvals up 6.4% mom, the trade surplus of AUD 1.9bn coming in twice as high as expected and retail sales rising a faster-than-expected 0.4% mom. The Australian housing market and potential fall-out for the domestic economy from the US-China trade war have been sources of concern for the Reserve Bank of Australia. The RBA is unlikely to fundamentally change its stance with regards to interest rate policy but at the margin may sound a little more hawkish at its policy meeting on 7th August.
