- Rates: Fed will hike its policy rate, but what about the rest?
Many questions remain about tonight’s FOMC meeting with a new dot plot, new forecasts and probable changes to the communication in the policy statement. Some items could cancel each other out and mute the market impact. It’s hard to assess the short term direction, but we hold our long term negative view on US Treasuries. - Currencies: Will the Fed revive the USD’s positive momentum?
The Fed is largely expected to raise its policy rate tonight. A hawkish tone/dot plot might support some further USD gains. Especially USD/JPY might profit. The gain of the dollar against the euro might be more modest as the ECB is also expected to announce a less easy policy tomorrow. Sterling remains in the defensive as Brexit uncertainty persists
The Sunrise Headlines
- The US equity markets closed all in surplus but one, the DOW JONES (-0.01%). Asian markets opened in red this morning, with the exception of the Japanese TOPIX (+0.47%) and the NIKKEI 225 (+0.40%).
- Therese May has narrowly avoided a humiliating defeat over Brexit bill ‘the meaningful vote’, that would give parliament more power to steer negotiations with the EU, after she made promises to make significant concessions to the bill.
- Poland’s president Andrzej Duda has laid out plans to address the country’s relationship with the EU as part of a wide-ranging constitutional referendum. He’s stating ‘the Poland’s 1997 constitution needs updating’.
- Czech billionaire tycoon Andrej Babis and his Ano party are close to a provisional coalition deal with the Social Democratic party. A deal would end eight months of Czechs waiting for a government.
- Bulgaria will seek to join membership in both ERM-2 and the banking union within the year, hinting Bulgaria’s path to the euro is moving forward.
- Australia’s central bank chief Philip Lowe stated that policy tightening Is ‘still some time away’, since inflation is not picking up enough to be in line with the RBA’s medium-term target.
- In the US, the PPI Final Demand MoM/YoY (May) is taking place, as is the FOMC rate decision. For the UK we see the CPI MoM/YoY and CPI core YoY for last month and in the EMU the Industrial Production SA MoM/WDA YoY is issued
Currencies: Will The Fed Revive The USD’s Positive Momentum?
How much will USD profit from a hawkish Fed?
An early euro rebound was capped after a poor ZEW investor confidence release yesterday. US inflation trended higher with the headline figure printing at 2.8% Y/Y. The report was as expected. The dollar reaction was initially limited, but the US currency captured again a better bid later in the session as markets pondered the chances for a potentially hawkish outcome of today’s Fed meeting. EUR/USD closed the session at 1.1745 (from 1.1784). USD/JPY also maintained a cautiously positive bias and finished the session at 110.37.
Asian equitiesy mostly show modest losses this morning as markets await this evening’s Fed decision. A hawkish Fed is potentially negative for (Asian) EM. Japan is the exception to the rule as USD/JPY extends gains. The dollar also maintains most of yesterday’s late session gain against the euro. EUR/USD hovers in the mid 1.17 area. The Aussie dollar (AUD/USD 0.7575) stays in the defensive on USD strength. RBA’s Lowe indicated that a first RBA rate hike was still ‘some time away’.
European production data and US PPI probably won’t have a market impact today as markets are looking forward to this evening’s Fed meeting. A rate hike is considered a done deal. We expect the Fed dots to indicate two additional rate hikes this year. Maybe the indication of the neutral policy rate might also be raised to 3.0%. Markets will also look out for any guidance from Fed Powell on the strategy the Fed will apply as the US economy is becoming ‘late cycle’. We expect a rather hawkish assessment. This might be USD supportive short-term. Especially USD/JPY might profit. The picture for EUR/USD is more diffuse as the ECB is also expected to indicated a less easy policy tomorrow. We expect any EUR/USD decline to remain modest. In a MT perspective, we maintain the working hypothesis that a further decline of EUR/USD below the 1.1510 support won’t be easy.
Sterling showed some nervous intraday swings yesterday. The UK currency finally gained some ground (against the euro) as UK PM May survived a key Brexit vote in Parliament. However, the amendment on the ‘meaningful vote’ is still subject to debate in the conservative party and will return to Parliament. UK CPI is expected stable at 2.4% Y/Y (core 2.1%) today. There is probably a big positive surprise needed to reinforce market expectations on an August BoE rate hike. We assume that the downside in EUR/GBP is rather well protected in the 0.87 area.
USD (DXY-trade-weighted): will Fed revive positive USD momentum
