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Rates set to continue to rise following FOMC minutes

By Hamish Muress

It was another improvement yesterday for sterling as it traded higher against the USD before retracing in the evening. With no major economic data released for the pound between now and the end of the month the pound is being driven by two things at the moment, USD outflows and Brexit news. Firstly the recent USD weakness driven by optimism over the US-China trade talks has the pound swing over 2% against the USD in the last eight days. Secondly, UK-Brexit negotiations have renewed once again with the tone from the Raab – Barnier press conference creating further optimism. Perhaps just to temper this optimism the government is set to release its ‘no deal’ advice for UK businesses this morning.

Overnight the Federal Reserve released its latest minutes which showed that the FOMC expected to continue to raise rates gradually. The initial reaction for the USD saw it sell off, perhaps due to the fact that the Fed admitted they were concerned that GDP could slow in the second half of the year due to continuing trade disputes (it wasn’t long ago that President Trump was standing on the front lawn of the White House bragging about US growth). Interestingly as well the Fed also indicated that it may soon reach rate neutrality i.e. the levels where they’d like to leave rates, ceteris paribus.

Following on from the story earlier in the week that the President’s former lawyer Michael Cohen pleaded guilty to election campaign rules, Donald Trump has now come out and said the ‘later on’ he knew about the payments and that the payments made were legal. This may be another case of the President Trump contradicting himself and whilst the effect on the USD cannot be measured at the moment these comments may not help Trump himself, the Republicans chances at the midterms which aren’t far away (very exciting, eek!), or the USD itself further down the line.

EUR/USD is having a fantastic week with the Euro one of the best performing majors. The euro has forgotten the yearly lows we saw last week and surged around 2.8% against the dollar. This morning sees the release of a raft of EU data as well as the ECB minutes at lunch time which could add further support to the Euro surge. The only note of caution should come from the Italy, where investors are shedding Italian bonds amid fears over the new government’s first budget which is currently being negotiated and could contravene EU budget rules.

The saga continues. No sooner do our morning reports go to print there is another twist in the ensuing battle for the Australian premiership. It’s like binge watching Game of Thrones. The Aussie lost around a cent against its US counterpart as three more of Malcolm Turnbull’s cabinet resigned, a move that is expected to trigger another leadership vote. However, to add further drama, Peter Dutton, the former colleague of Turnbull and his main thorn in his side may in fact be ineligible to sit in Parliament due to his business activities. What happens next is anyone’s guess but what is certain is that the Aussie dollar does not benefit from all of this uncertainty. We will keep you updated as to what happens where we can.

With the news earlier in the week that the US and Mexico have come to a ‘handshake’ deal around NAFTA negotiations, Canada is now looking to rejoin the talks as soon as possible. This optimism may add support to the Canadian dollar which suffered yesterday following the disappointing release of retail sales which missed expectations.

The Kiwi lost some ground yesterday against the USD off the back of the FOMC comments. New Zealand trade balance data is set to be released overnight as well with the fallout from the ongoing trade war expected to be bite.