Chinese President Xi eases trade war fears, FOMC minutes out tonight

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11 April 2018

thomasdodds

The US Dollar touched its lowest level in two weeks against its peers on Wednesday morning, despite comments from Chinese President Xi that eased fears over the possibility of a global trade war.

P
resident Xi’s conciliatory speech attempted to de-escalate trade tensions, stating that China was ready to adopt lower tariffs while pledging to open the economy further. These calming comments pushed the greenback higher during early London trading, while causing investors to sell the safe-haven Japanese Yen and Swiss Franc.

Looking ahead, the Federal Reserve will this evening be releasing its latest set of meeting minutes from its March meeting, in which interest rates were raised for the first time so far this year. At the March meeting, the Fed fell short of expectations by failing to revise upwards its median expectations for hikes in 2018. However, given that the vote on rates was close to being upgraded to show four hikes on average, we think that a slightly more hawkish tone of communications in the minutes tonight could convince investors that a fourth rate increase in 2018 is possible. Comments on inflation and trade could also be crucial and rhetoric on a growing confidence that inflation will return to target would likely support the US Dollar this evening.

In the meantime, the latest US inflation data for March will be released this afternoon. The market is eying a modest uptick to 2.4% in the headline measure from 2.2%, which would likely further support the case for an accelerated path of interest rate hikes in the US this year.

Euro hits one week high on hawkish Nowotny comments

Growing expectations that the Bank of England will hike interest rates when it meets next month continued to support Sterling yesterday which broke above the 1.415 level against the Dollar. Notoriously hawkish member of the bank’s MPC Ian McCafferty was unsurprisingly upbeat on the state of the UK economy when he spoke yesterday and financial markets are now placing a near certain 90% chance of a hike at next month’s meeting. Industrial and manufacturing production data this morning could shift Sterling if we see any surprises when released at 9:30 UK time.

Elsewhere, the Euro recovered against the US Dollar yesterday afternoon after an earlier sell-off following some hawkish comments from an ECB member. Senior rate-setter Nowotny claimed that the central bank would end its QE programme this year, ramping up bets that an official announcement is likely in the summer.