OVERNIGHT MARKET SUMMARY
The U.S. dollar index jumped following a flurry of economic news, data and central bank announcements over the past two days. Yesterday, the Federal Reserve expectedly lifted its key lending rate for the second time this year and the seventh time in this cycle, an outcome that was widely telegraphed over recent weeks. The bank’s accompanying statement and the post-meeting press conference by Fed Chair Jerome Powell sounded a largely confident and upbeat tone on the economy with policymakers’ projections now signaling an additional two dollar-supportive rate increases this year, up from one at the bank’s last meeting.
This morning, the ECB expectedly made no changes to monetary policy at its Governing Council meeting but did signal that it will taper its monthly bond purchases to 15 billion euros in September and ultimately wind down its emergency stimulus scheme in December of this year. Many investors had doubted that the bank would commit to a clear timeline for tapering its asset purchases, given the recent economic softness in the euro zone and the recent political turmoil in Italy. The bank did however, push back its timeline for an eventual lending rate increase, saying it would keep rates steady “through next summer”. The euro tumbled to lows across the board as investors scaled back expectations for 2019 rate increase from the ECB.
A blowout U.S. retail sale report this morning supported the Federal Reserve’s upbeat tone from yesterday’s FOMC meeting and added to the greenback’s resurgent tone this morning. Headline retail sales jumped by 0.8%(m/m) in May, double the consensus forecast. Ex-autos, retail sales rose by an even stronger 0.9%(m/m), nearly double the forecast for a 0.5%(m/m) increase. Combined with a steeper than expected decline in weekly jobless claims, the retail sales report underscored the very solid U.S. economic backdrop.
Sterling enjoyed limited losses against the otherwise firmer U.S. dollar and jumped to more than a one-week high against the struggling euro after U.K. retail sales jumped by 1.3%(m/m) in May, well above the forecast for a rise of just 0.5%(m/m). It was the second monthly upside surprise to retail sales and helped offset some of the other recent disappointments in U.K. economic reports.
EM currencies found a much needed reprieve after the Fed’s expected lending rate hike yesterday. Currencies like the Turkish lira, the South African rand and the Mexican peso were all firmer as investors bought them back after days of heavy selling. A slightly “dovish taper” announcement from the ECB suggested a slower pace of eventual policy tightening in the euro zone, which helped revive some support for this rate-sensitive group of currencies.
USD: The U.S. dollar, which had fallen to a one-month low just ahead of the ECB’s announcement on monetary policy earlier this morning, soared to a 10-day high following the European Central Bank’s “dovish taper” announcement. While the ECB did signal that it will scale back its monthly asset purchases in September and ultimately end its stimulus scheme in December, it pushed out expectations for when it plans to eventually hike lending rates in the 19-member bloc. The Fed yesterday expectedly hiked U.S. lending rates for the second time this year and signaled that improving growth and rising inflation would likely result in a two more dollar-supportive hikes this year, up from the previous forecast for one more hike. The upbeat and confident tone from Fed Chair Powell yesterday was justified by this morning’s blowout retail sales report for May which added to the dollar’s resurgent tone. On balance, the hawkish outlook for U.S. rates relative to rates in most of the rest of the industrialized world, a key drive of the greenback’s rally since mid-April, should remain a tailwind for the dollar going forward.
EUR: The euro tumbled by over a full cent against the greenback, hitting a 10-day low after the ECB signaled that it will taper its monthly bond purchases in September but that it sees lending rates remaining steady “through the summer of 2019”. That slightly longer timeline for an eventual lending rate hike (previously investors had priced in a 0.10% hike in June of 2019) as well as the bank’s slightly downgraded projection for euro zone GDP and ECB President Mario Draghi’s generally cautious tone, sent the euro sliding across the board. The news of the September taper was more than offset by the more dovish outlook for euro zone rates, especially compared to the slightly more hawkish outlook for lending rates in the U.S. Consequently, the euro remains vulnerable to retesting recent lows against the U.S. dollar.
GBP: Sterling’s loses against the rallying U.S. dollar were limited by a very strong U.K. retail sales report for May. The 1.3%(m/m) jump in retail sales eclipsed expectations for a gain of just 0.5%(m/m) and helped offset some of this week’s disappointment in U.K. wages and CPI. While the data overnight is not likely strong enough to meaningfully alter the outlook for the BOE to remain sidelined until at least the fall, it did help push the pound to a one-week high against the broadly heavier euro.
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