Commodity currencies outperform as markets see past Fed, Bank of England hawkishness

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19 June 2017


Two major central banks reinforced the view last week that the rate cycle has changed for good.

he Federal Reserve chose to look past recent soft data, in particular the downward surprise in inflation readings, and maintained roughly unchanged both economic projections and the future rate path in the famous “dot plot” graph. Then Thursday the Bank of England delivered an outright hawkish surprise when two new dissenters joined Kristin Forbes to call for an outright hike in rates. None of this availed much their respective currencies as the Euro, Sterling and the US Dollar ended the week within 0.5% of where they had started it with respect to each other.

On the other hand, the Canadian and the Australian Dollar reacted quite well, the former to central bank hawkishness and the latter to strong economic data, as they topped the G10 weekly rankings.

This week, Federal Reserve speakers will be the focus of attention on Monday and on Tuesday. Eurozone business activity PMI indices are out on Friday. New Zealand and Norway’s central banks meet on Wednesday and Thursday respectively. Aside from that, the calendar is fairly light.

Major currencies in detail


The UK is just about the only major economy where inflation is surprising consistently to the upside. The post-Brexit devaluation in Sterling continues to filter through. The effect on living standards is clearly negative, as real wage growth has shifted from firmly positive to firmly negative as a result. This is the context in which the significant hawkish shift in the Bank of England’s MPC should be seen.

This week is relatively light in terms of data out of the UK, so expect markers to focus on headlines and leaks from the Brexit negotiations which start officially on Monday.


As this is written, election results from France show Macron’s new party achieving a comfortable absolute majority. This may provide some short term boost for the Euro, but the key numbers this week are the advance PMI business activity numbers for the month of June. No major change is expected, and the theme of continued economic growth with a complete absence of price pressures should stay intact.


An interesting dichotomy has emerged in the US. On the one hand, inflation numbers have shown distinct weakness over the past few months. On the other, it is clear that the Federal Reserve is ready to look past this weakness, ascribing to one-off factors such as changes in cell phone plan pricing. The gap between market expectations of US hikes and what the Federal Reserve actually expects to happen has reopened. As before, we expect the Fed to be the winner in this particular fight and think that US rates are headed higher from current levels, which should provide good support for the US Dollar over the medium term.