Action Insight

We have got a more hawkish FOMC and BOE this week. For the former, policymakers raised the policy rate by +25 bps, as expected, and laid out detailed plans to unwind the balance sheet. For the latter, BOE left the Bank rate unchanged at a record low of 0.25%. Yet, the members' division on the monetary policy widened the most in 6 years with Michael Saunders and Ian McCafferty joining Kristin Forbes in support of a rate hike of +25 bps. The tug of war on interest rate differential results in higher volatility in GBPUSD. After BOE's announcement, GBPUSD erased earlier loss from an intra-day low of 1.2688 and rallied to 1.2795, before retreating again. The selloff of EURGBP widened with the pair plunging to a one-week low of 0.8721. ECB earlier this month refrained from talking about tapering and reaffirmed that it would extend QE purchases, if necessary.

Dollar extends post FOMC rebound in early US session after positive economic data. Initial jobless claims dropped 8k to 237k in the week ended June 10, below expectation of 241k. Four-week moving average rose 1k to 243k. That's the 119 straight weeks initial claims stayed below 300k handle, last seen in early 1970s. Continuing claims rose 6k to 1.935m in the week ended June 3 staying below 2m handle for the 9 straight week, last seen back in 1973. Empire State manufacturing index rebound to 19.8, up from -1. Philly Fed survey though, retreated to 27.6 but beat expectation of 25.0. Industrial production, rose 0.0% in May while capacity utilization dropped to 76.6%.

Dollar recovered overnight as Fed delivered the widely expected rate hike. The overall announcement, including new economic projections, was not as bad as some anticipated. Fed maintained the projection of a total of three rate hike this year. Downward revision in 2017 inflation forecast was somewhat offset by the upward revision in GDP forecast and downward revision in unemployment rate forecast. On other hand, both growth and inflation forecasts for 2018 and 2019 were held unchanged. While the greenback was lifted, it's clearly not out of the woods yet as markets seem not fully convinced by what Fed said.

Dollar recovers after Fed doesn't disappoint the market and raised federal funds rate by 25bps to 1.00-1.25%. Minneapolis Fed President Neel Kashkari dissented and voted for standing pat this time. But the greenback is supported by the fact that Fed didn't change inflation forecast for 2018 and 2019. Also, Fed maintained interest rate projections unchanged for 2017 and 2018. Fed released an "addendum to the political normalization principles" laying down the guidelines to shrink its balance sheet. Overall, even though the greenback was sold off after CPI disappointment earlier today, it's kept above key support level around 1.13 handle against Euro and more stimulus is needed to trigger sustained breakout.

Dollar is under some renewed selling pressure in early US session after poor economic data. Headline CPI dropped -0.1% mom, rose 1.9% yoy in May. The annual rate was notably slower than prior month's 2.2% and missed expectation of 2.0%. Core CPI rose 0.1% mom, 1.7% yoy. The annual rate was also slower than prior month's and expectation of 1.9% yoy. Headline retail sales dropped -0.3% in May, below expectation of 0.1%. Ex-auto sales dropped -0.3% versus expectation of 0.2%. The weakness against Canadian Dollar is particularly clear as USD/CAD is now clearing 1.3222 key near term support firmly. There is prospect of EUR/USD revisiting 1.1298 key resistance level even before FOMC announcement.

US markets regained strength overnight with DOW and S&P 500 closed at record highs as selloff in tech stocks stabilized. DOW gained 92.8 pts, or 0.44% to end the day at 21328.47. S&P 500 rose 10.96 pts, or 0.45% to close at 2440.35. However, no strength was seen in treasury yields as 10 year yield lost -0.006 to close at 2.207, staying well below 2.297 resistance and maintains near term bearish outlook. In the currency markets, Canadian Dollar remains the strongest one as boosted by hawkish twist in BoC officials' rhetorics. Meanwhile, Dollar is trading as the weakest major currency for the week. The development argues that traders could be quite concerned with a dovish FOMC hike today.

Canadian Dollar remains the strongest major currency today as boosted by comments from BoC official. Meanwhile, Sterling follows closely as lifted by stronger than expected consumer inflation data. On the other hand, the Japanese Yen trades as the weakest major currency as risk aversion recedes. Dollar follows as the second weakest as traders are getting cautious ahead of FOMC rate decision tomorrow. In other markets, Gold is suffering steep selling and is back at around 1262. WTI crude oil also stays soft in tight range around 46.

Canadian Dollar jumps sharply overnight as boosted by comments from a top BoC official that raises prospect of a rate hike. Senior Deputy Governor Carolyn Wilkins said in a speech that adjustment to lower oil prices was "largely behind us" with help of the rate cuts in 2015. And, there are "encouraging signs" of broadening growth across regions and sectors. Meanwhile, there is "significant monetary policy stimulus in the system". And, she noted that "as growth continues and, ideally, broadens further, Governing Council will be assessing whether all of the considerable monetary policy stimulus presently in place is still required." This is seen by the markets as an indication that the door for further rate cut from the current 0.50% is closed. And the next move would be a hike.

The Japan Yen surges broadly today on risk aversion as last week's selloff in NASDAQ is spreading over. At the time of writing, DAX is trading down -0.9% while CAC is down -1.0%. FTSE is down a mere -0.1% as helped by renewed selling in Sterling. While DOW opens nearly flat, NASDAQ is losing another -1% in early trading. Elsewhere, the Pound is under some pressure again as it breaches last week's low against Euro and Yen. Dollar is also trading softer as despite firm expectation of an FOMC rate hike later in the week.

Sterling trades mildly softer against Dollar, Euro and Yen today. But it's holding above last week's low so far. After the disastrous election, UK Prime Minister Theresa May announced her new cabinet on Sunday. Stability was clearly seen as her priority as all the most senior ministers stay. The list includes Chancellor of Exchequer Philip Hammond, Foreign Secretary Boris Johnson, Defense Secretary Michael Fallon and Home Secretary Amber Rudd. Also, David Davis kept his job as Brexit Secretary. While there are still calls for May to quit, she seems to have steadied the boat, as least for the moment. And preparing for Brexit negotiation with EU would now be back as one of her top priorities.

Sterling ended last week as the weakest major currency. The Conservatives' losing of majority in the parliament created much uncertainty on politics, economic policies and Brexit negotiation. While the selloff in the Pound was steep, it's so far holding on to key support level against Dollar, Euro and Swiss Franc. And it seems like traders are still holding some of their bets to watch the developments in near term. Euro ended as the second weakest major currency for the week as traders were not satisfied with the tiny hawkish move in ECB's language. And the general weakness in European majors also dragged the Swiss Franc.

China's headline CPI inflation accelerated to +1.5% y/y in May, from +1.2% a month ago. for the first 5 months of the year, CPI has stayed at average of +1.4%, amongst the lowest levels in history. Core inflation steadied at +2.1% in May. Non-food CPI moderated to +2.3% from 2.4% in April. Food inflation remained in contraction but the decline narrowed to -1.6% y/y in May from -3.5% in the prior month. We believe it was the low base that had helped improve the reading. PPI inflation continued to slow, falling to +5.5% y/y in May from +6.4% in April. Weakness in commodity prices is expected to weigh on PPI, sending it lower to around +5% in coming months.

Sterling stabilized a bit after the post UK election sharp fall. After suffering the election backslash and losing majority in the parliament, Prime Minister Theresa May visited the Queen at Buckingham Palace to get permission to form a new government. May emphasized that "what the country needs more than ever is certainty" and "now, let's get to work". The Conservatives is now expected to form coalition with Northern Ireland's Democratic Unionist Party. And both parties reached consensus to keep May in the position for now. But overall, May's political survival remains in question. And, there are five candidates identified who could fill the role of Prime Minister, including Boris Johnson, Philip Hammond and David Davis.

With 98% of the vote declared, PM Theresa May's Conservative Party would remain the biggest party with over 300 seats in the Parliament. However, Tories would highly likely fall short of majority. The disastrous scenario in our previous report materializes: A hung parliament is now inevitable. Yet, unlike the situation in 2010, Tories would find it very challenging to form a coalition government with other parties. The snap election not only has resulted a reduction in number of seats for Tories, but also has scrapped their majority status in the Parliament. This would only make the Brexit negotiation with the EU more difficult, even if Tories managed to form a coalition government.

Sterling tumbles sharply and broadly as the UK election is now very likely proved to be a serious blow to Prime Minister Theresa May and the Conservatives. While the Tories would still get the most seats, exit polls showed that it's going to lose majority and get only 318 seats, down -13 from prior parliament. On the other hand, Labour would probably set 267 seats, up 35. That means UK is now heading to a hung parliament and that is seen by many market participants as the worst case scenario. Much uncertainty would be injected into UK politics, economic policies and most importantly, the Brexit negotiation with EU. And it clearly showed that May's bold decision for a snap election has backfired and it's now even uncertain how long May will stay as Prime Minister.

ECB President Mario Draghi poured cold water onto hawks who had anticipated a more upbeat policy statement following recent improvement in macroeconomic data. However, the central bank downgraded the inflation forecasts for three years despite upward revision on GDP growth. The forward guidance was slightly less dovish with the reference "or lower" removed. Honestly, all of us understand that, at the currently exceptionally low (some are negative) interest rates, further rate cuts would offer little help to the economy. Notwithstanding expectations that the ECB would begin preparing the market over QE tapering, the central bank maintained the easing bias, reiterating the commitment to accelerate its monthly asset purchases if necessary. The single currency remains under pressure after dropping to a one-week low against the US dollar.

Euro dips mildly after ECB left monetary policies unchanged as widely expected. The central bank moved a tiny step by closing the door for further rate cut. But it leaves the door open for extending the asset purchases. Meanwhile, inflation forecasts were revised down as media reported earlier in the week. But that was offset by the upward revision in growth forecasts. Markets will now look into former FBI Director James Comey's hearing in Senate Intelligence Committee. At the same time, voters in UK are going to vote for their government. Exit polls are expected to be published at around 2200 GMT. By that time, hopefully, we will have a clearer picture on the results of the election, a landslide Conservative victory, a hung parliament, or a surprised Labour win.

Sterling is steadily in range as the latest poll on the eve of today's election showed that the Conservative could get an increased majority. According to ICM, Conservatives got a 12 point lead over Labour, 46 to 34. ComRes suggested a 10 point lead with Conservatives at 44, Labour at 34. YouGov said Conservatives got 42 and Labour got 35, 7 point lead. Meanwhile, Survation results showed Conservative at 41.3, Labour at 40.4, a mere 0.9 point lead. YouGov Director Anthony Wells said that "the seven-point Conservative lead is the same as at the previous election, but we think it is likely they will nevertheless be returned with an increased majority." But there is one key factor that analysts pointed out. The turnout of young voters is uncertain and they typically support Labour.

Euro dips broadly today as it's reported that ECB would downgrade inflation forecast in the staff economic projections to be published tomorrow. Bloomberg quoted unnamed source noting that ECB staff forecasts inflation to be at 1.5% in 2017, 2018 and 2019. That's quite notable downward revision from prior forecasts of 1.7%, 1.6% and 1.7% respectively. Weakness in energy price is seen as a major factor for the change. This will add to the case for policymakers to be have more patience regarding any stimulus exit. However, GDP forecast will be another thing that's closely watched for any upward revision. Based on March staff projections, Eurozone economy will grow 1.8% in 2017, 1.7% in 2018 and 1.6% in 2019.

Australian dollar surges broadly today as GDP grew 0.3% qoq in Q1, meeting market expectations, even though it's sharply slower than prior quarter's 1.1% qoq. But after all, it's the 103rd successive quarter, or 26 years, without recession. And it's now a new world record of a country without a recession. Treasurer Scott Morrison said that "the results demonstrate the continued resilience of the Australian economy:" Some analysts noted that the slowdown in Q1 showed that the economy is "tired". But Morrison blamed the weather for the slowdown in Q1 and argued that improvements would be seen ahead. He noted that RBA Governor Philip Lowe reiterated yesterday that he expects the economy to grow above 3% in the next couple of years.