Dollar rally resumes on hawkish Fed, dovish ECB
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The contrast between the Federal Reserve’s increasingly hawkish outlook and that of almost every other major currency area, became starker last week following the Fed and ECB meetings.
This week should be almost as rich in key Forex market events as the previous one. In addition to the Bank of England meeting on Thursday, the eurozone’s PMI indices of business activity should provide an early read on whether the economy is rebounding from its recent bout of weakness.
Major currencies in detail
GBP
Better than expected headline news from the labor report last week meant the Pound held its ground better than most against the US dollar, although this still meant a loss for the week. Markets appear to expect a repeat of the previous meeting this week, with MPC members voting 7-2 for the status quo and no hikes. Any further defections to the hawkish side would undoubtedly be a strong positive for Sterling.
EUR
Despite the somewhat surprising announcement of an end date to its QE programme, the common currency fell sharply after the ECB indicated that any interest rate increases in the Euro-area remain a very long way off. The ECB explicitly stated in its statement that ‘significant stimulus was still needed’ and that it expects the key interest rates to remain at present levels ‘at least through the summer of 2019’. This was considerably further away than markets were pricing in. President Draghi also used the post-meeting press conference to reiterate the ECB’s dovish message. Unsurprisingly, the Euro broke through recent resistance levels to end the week below 1.16. Some relief for the common currency could come this week, if the PMI business activity indices stabilise.
USD
The Federal Reserve raised rates by another 25 basis points on Wednesday, while signalling that it is ready to hike on a further two occasions in 2018, a faster pace than the market was pricing in going into the meeting. The FOMC’s ‘dot plot’ showed a modest upward shift in short term rate forecasts. This implies that the central bank is now on course to hike again in September and then again in December, when the next two sets of economic projections will be released. The consequence was the ongoing broadest-based rally in the US dollar, with the dollar rising against every major currency in the world.
This week is quite light in terms of macroeconomic releases out of the US, and we expect the dollar to be driven by news elsewhere, as well as, the fall out from the tit-for-tat tariffs between China and the US.