The Forex Week In Review
The main focus for Forex markets this week was the June FOMC meeting. Ahead of the meeting, there had been a sharp unwinding of US rate-hike expectations on the back of the dismal May Non-Farm Payrolls report with traders quickly moving to price out a June hike.
The Fed as expected left rates unchanged at 0.25-0.50% at yesterday meeting in an unanimous vote, amid Brexit risks and mixed economic picture at home. While data showed growth is picking up, the labour market slowed. “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation”.
The growth forecast for the year has been downwardly revised to 2.0% (previous: 2.2%) and its outlook for 2017 from 2.1% to 2.0%. Inflation forecast for this year has been revised slightly higher to 1.4% from 1.2% but projection for next year remains unchanged at 1.9%. The Fed has obviously turned less hawkish and Fed Chair Janet Yellen gave no indication of the timing of the next hike and added that Brexit would have “consequences for economic and financial conditions in global financial markets”.
USD June FOMC failed to reassure USD bulls that a rate-hike is still likely in the coming months. Citing global risks from Brexit and mixed economic data the Fed kept rates on hold in June with no signal as to the timing of future rate-hikes. On the data front US May Retail Sales were stronger than expected at 0.5% vs 0.3% expected whilst US CPI was weaker than expected YoY in May printing 01% vs 1.1% expected.
EUR The single currency remains pressure by Brexit uncertainty with investors anticipating damage to the EU economy should Brexit occur. ECB Vice President Victor Constancio spoke this week saying that he believes “without upheavals in the world economy we can reach a slightly higher level of inflation in 2018 than the ECB’s June forecast of 1.6%” . He also commented “the full implementation of our policy package adopted last March is still going to produce effects in the forthcoming months and will contribute to achieve our mandate of delivering inflation below but close to 2%, over the medium-term”. Also on the wires was ECB’s Nowotny who noted that the ECB are ready to cushion the market with liquidity should Brexit occur. On the data front Euro zone trade surplus rose to a record high of €28.0 billion in April (March: revised to € 23.7billion) due to quicker MOM increase in exports (+4.9%) vs imports (+2.6%)
GBP Headline and core CPI in the UK missed expectation in May, increasing BOE’s concerns of achieving the desired inflation target on top of intensifying risks on economic growth due to the upcoming EU referendum. CPI was unchanged at 0.3% YOY, less than the expected 0.4% YOY growth. Core CPI on the other hand, rose 1.2% YOY for the month of April and May. Other price gauges were also lackluster. Retail prices climbed 1.4% YOY in May (April: +1.3% YOY) while producers prices dropped 0.7% YOY last month. As expected, the BOE kept rates on hold at their June meeting with a statement that contained stark warnings about the risks of Brexit which the BOE forecast will lead to a surge in Unemployment and adversely affect the global economy also. GBP UK unemployment rate dropped 0.1ppt to 5.0% in the three months through April, the lowest in more than a decade as the number of jobs added rose by 55k to a record of 31.6 million. In sync, jobless claims continued to slide in May (-0.4k vs April: +6.4k) while claimant count was unchanged at 2.2%. News later in the week that a British MP had been shot and killed caused a rally in support for the “Remain” campaign seeing GBP rally in tandem.
JPY BOJ made no change to its existing monetary policy, increasing its annual monetary base at the pace of about 80 trillion yen. Interest rate will be maintained at -0.1% and the central bank offered a slightly weaker view on consumer inflation than in April which is projected to stay slightly negative or about zero percent in the short term
AUD The Australian Dollar rebounded in tandem with the GBP since a British member of parliament was shot dead in the street, markets rekindled sentiments supporting Britain to stay. The Australia’s May jobs data showed an economy in fairly good health. However, the external risks to growth were not lost on policy makers
CAD The Canadian Dollar softened over the week in sync with moves in Oil which came under pressure amidst a heightening of investor uncertainty amidst growing concerns for Brexit. Canadian CPI on Friday printed just below expectations.