Investors grapple with whether US Bonds will remain elevated

Daily Currency Update

ECB policymakers are increasingly expected to reduce rates by 25 basis points at their June meeting as Eurozone inflation continues its march lower. Adding fuel to this speculation was data released on Friday showing Eurozone business growth slowing with pay hikes easing considerably. However, the outlook remains murky with the prospect of a fragmented world, cheaper imports from China and stronger domestic demand from Germany's fiscal spending plans which are creating contrasting forces and policy indecision.

Bank of England policymaker Megan Greene, said US tariffs would probably lead to lower rather than higher inflation. Greene added that she is concerned about Britain’s weak productivity growth and supply-side constraints on the economy. There is also considerable uncertainty around the implications of the recent budget on the economy and in particular high labour costs with the UK minimum wage having recently risen by 7%. Markets have assigned a 96% probability that the UK will lower borrowing costs when they meet on May 8^th.

When President Trump threatened to fire Fed chair Jerome Powell last week, the markets reaction was so vigorous it ended up being a disciplinary reality reminding the Trump administration that, if you cross that line, it could have some very severe implications. This was evident as the Dollar fell 3% and the US bond market continued to kite higher. At the heart of policymakers concerns is that there is no ready alternative to the United States being the world’s financial hegemon, a situation that economists refer to as the Kindleberger Trap after renowned historian Charles Kindleberger.