USD stronger & GBP/EUR pushes higher
The big overnight story is the direction of the USD, which gained ground last night, pushing GBP/USD below 1.4000 and EUR/USD to 1.1950.
The decline of EUR/USD was accentuated by statements from the ECB which suggest that the removal of supportive measures will not happen soon = ECB member Lane said:
“It is premature to talk about the end of PEPP.”
“September will be important but a lot of data is still missing.”
GBP/EUR was also helped by a weakening €€, pushing to 1.1700 which is the top-end of the recent range, and not seen since early 2020.
The US central bank has pledged to continue to support the economy even as the effects of the coronavirus pandemic ease. The Federal Reserve kept interest rates on hold at near zero & and said that rising inflation was “largely reflecting transitory factors “.
A statement by the Fed following its two day policy meeting in Washington said that while employment had strengthened “risks to the economic outlook remain “.However, it warned that the path of the economy would depend significantly on the course of the virus.US inflation continued to surge in May with consumer prices jumping by 5% in the past year, the biggest year on year increase since August 2008.
Most members of the Federal Open Markets Committee have brought forward predictions for the first post Covid interest rate hike to 2023 - seven out of 18 FOMC members signal at least one rate hike already next year.
Danske Bank economists have said:
“We now expect the Fed to turn more and more hawkish in coming months so that actual tapering will start in Q4 21 (previously in January 2022). We expect tapering is concluded in summer 2022 (previously September 2022). We expect the first rate hike in H 2022 (previously Q1 2023). Overall, we see a road from here with tapering, rate hikes and a mild liquidity tightening in coming years.”
Contrary to the ‘transitory’ inflation story, the Wall Street Journal yesterday reported that China is moving to sell major industrial metals from its stockpiles in an effort to squelch factory price increases which are stoking fears of global inflation. We think the ‘transitory’ vs ‘real’ inflation stories will continue through the summer and cause divergent policy paths across the globe.
AUD & NZD: Both stronger (fighting the USD strength!). AUD - An enormous upside surprise in jobs data (115,200 jobs created in May and a drop in unemployment to 5.1%) pushed AUD higher. NZD benefitted from 1.6% growth in Q1 – an impressive figure higher than expectations.