OVERNIGHT MARKET SUMMARY
The U.S. dollar put in a mixed performance against its major rivals overnight but held in generally familiar territory ahead of a key Fed monetary policy announcement this afternoon. The Fed is widely expected to lift its key lending rate by 0.25% at the conclusion of the bank’s two-day meeting this afternoon- a move that would mark the bank’s second quarter-point hike this year. With markets largely pricing in an increase in U.S. borrowing costs this afternoon, the dollar and broader financial markets will take their cue from the extent to which the Fed signals that rates could rise a total of four times this year, up from the previous forecast for three rate increases in 2018.
This morning, data on wholesale price inflation blew through consensus forecasts, with PPI rising by 0.5%(m/m) and 3.1%(y/y) in May, both much hotter than the 0.3%(m/m) and 2.8%(y/y) forecasts. Even the core PPI, which strips out volatile food and energy prices, rose by a hotter than expected 0.3%(m/m). Today’s above-consensus PPI data follows yesterday’s hotter than expected CPI figures and collectively, likely add to the chances for the Fed to signal a potentially faster pace of dollar-supportive rate increases in today’s policy statement and post-meeting press conference.
The euro was slightly firmer against the greenback overnight but largely held in narrow trading ranges ahead of today’s Fed statement and tomorrow’s ECB meeting. The ECB tomorrow is not expected to make any changes to monetary policy but investors have raised expectations for the bank to clarify forward guidance on when its emergency bond purchase program will be wound down. A clearer timeline for policy normalization by the ECB would likely support the single currency.
Sterling fell against the U.S. dollar after a cooler than expected U.K. CPI report overnight. The data more than offset news late yesterday that Prime Minister Theresa May was able to fend off a rebellion from within her own party with the lower house of parliament voting down amendments to the Brexit bill.
Emerging market currencies pared some of their overnight losses but remain broadly pressured by the prospect of rising U.S. rates and a stronger U.S. dollar. Countries with large external financing needs like Turkey, South Africa and Argentina remain the most vulnerable to rising U.S. interest rates.
USD: The dollar was mixed overnight but remained hemmed in generally familiar ranges ahead of this afternoon’s FOMC monetary policy announcement. The Fed is widely expected to lift U.S. borrowing costs by 25 basis points for the second time this year to a target range of 1.75%-2.00%. With a hike this afternoon largely baked in, the dollar and broader financial markets will take their cue from the bank’s statement and Fed Chair Powell’s post-meeting press conference. Key for the dollar will be the extent to which the Fed acknowledges recent strength in U.S. data and signs of mounting inflation. Such a scenario would likely prompt investors to price in higher chance of a fourth rate increase this year, a scenario that would likely keep the dollar’s broader rally, which began in mid-April but paused recently, largely in-tact.
EUR: The euro firmed off of yesterday’s low again the dollar but held in generally familiar ranges ahead of today’s Fed statement and tomorrow’s ECB Governing Council meeting. The ECB tomorrow is not expected to make any changes to monetary policy but following a flurry of official comments over the past weeks, expectations for a shift in forward guidance have risen. The ECB could signal a clearer timeline for winding down its monthly bond purchases. Such a scenario would likely support the euro as it would indicate policymakers are looking past the bloc’s slow start to the year and the recent political turmoil in Italy. However, given the extent of the slowdown in euro zone growth that was evidenced again in yesterday’s very soft German ZEW forecast and given that Italy’s new government is likely set on a fiscal collision course with Brussels, the ECB may wish to remain purposely vague in its timeline for policy normalization. Another open-ended or non-committal statement on policy normalization would likely hurt the euro.
GBP: Sterling fell to a one-week low against the dollar overnight after May’s CPI held at an annual rate of 2.4%(y/y), confounding expectations for a rise to 2.5%(y/y). The data follows yesterday’s disappointing wage figures and further dampens expectations for a near-term rate increase by the BOE. The pound enjoyed a short-lived bounce yesterday after the lower house of parliament backed PM Theresa May’s call to strike down the upper house’s amendments to the Brexit. The move is seen as giving PM May a stronger mandate with which to negotiate with the EU and reduces some concerns about the fractured state of the ruling Tory Party. The vote does not however meaningfully reduce uncertainty surrounding the Brexit, which should remain a headwind for the pound.
EM: Riskier and emerging market currencies pared earlier losses but remain broadly pressured against the greenback ahead of today’s expected Fed lending rate increase. Rising interest rates in the U.S. make riskier but higher yielding assets marginally less appealing for global investors. Within this group, nations like Turkey, South Africa and Argentina with high external deficits, remain most vulnerable. The South African rand fell to a new six-month low before bouncing overnight. Meanwhile, Mexico’s peso remains near a 16-month low as trade worries with the U.S. mount and investors look to a July 1 election that could see a leftist Andres Obrador win the presidency.
|DOLLAR OVERNIGHT PERFORMANCE VERSUS|
|MARKETS AND COMMODITIES PERFORMANCE|
|US 10 YEAR