Fed hike sends USD lower!By Arnaud Masset
The US Federal Reserve increased rates 0.25% yesterday, before which the greenback appreciated sharply in the minutes before the announcement, but then erased those gains almost immediately. Investors realised nothing has changed! The dots plot didn’t change much as well. The Fed continues to signal two more rate hikes for 2018, most likely in September and December. Fed Chair Jerome Powell avoided mention of the trade war initiated by Donald Trump, even though it could have significant consequences for the US economy.
In forex the buck is losing ground against its G10 peers, except the Australian dollar that is suffering from trade war uncertainties and weak Chinese data. With the Fed now in the rear-view mirror, investors are impatiently awaiting this afternoon’s European Central Bank meeting.
ECB focuses on “normalization”By Peter Rosenstreich
Today’s European Central Bank meeting is critical. ECB board members have been quiet on normalization, so it should provide insight into the minds of Draghi & Co for any quantitative-easing tapering or interest hikes. Last quarter’s decelerating European growth will hurt the GDP outlook. Weak prices are sending core inflation back towards cycle lows. ECB’s corporate line is that risks are transitional and balanced. But given the soft-patch, no one would be confused by an ECB pause in hawkishness. With economic worries haunting, the risk is increasing that an anticipated June or July decision of tapering might be delayed.
Meanwhile, political risk and hype is building in Italy, Spain and Greece, which might change the ECB’s mind. The recent, sharp rise in interest rates on the periphery suggests tighter finances for the region’s weaker nations. However, the threat of a shock will only strengthen the ECB’s desire to get policy off the bottom, because it has few options to manage a crisis. Rates are already negative and bond buying is running into supply shortages. As with the US Federal Reserve in 2013, the need to remove extreme policy, to regain policy firepower, outweighs temporary economic weakness. Given the weakness in EUR/USD, the market is underpricing ECB’s commitment to “normalization.”