Federal Reserve leaves interest rates unchanged citing a resilient economy.
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Daily Currency Update
European Central Bank supervisor, Sharon Donnery, said yesterday that Euro zone banks should watch for a rise in bad loans, particularly when they lend to small businesses, consumers and commercial real estate in less desirable locations. She added that “the current geopolitical environment adds a new layer of uncertainty and is a source of downside risk to the outlook. Rising global trade tensions and supply chain disruptions also pose risks to banks with significant exposures to export-oriented industries, such as manufacturing.”British inflation cooled in May as was expected by the Bank of England and is expected to keep borrowing costs unchanged when it meets later today while also grappling with international energy markets that have been rocked by the escalating conflict in the Middle East. Consumer prices rose by 3.4% in May which was in line with analyst’s expectations. It is also noteworthy that Britain now has the highest rate of inflation out of 16 western European economies that have reported comparable harmonised data for May.
It’s tempting to think the dollar’s precipitous decline this year will soon taper off, but the move seems neither speculative nor cyclical and a meaningful turnaround could be years away. The dollar index’s near 10% decline this year marks its steepest first-half loss since 1986. Overshoots are typical in currency markets and given the pace of the decline this year the dollar could stage a correction but all signs point toward “smart money” sitting on the sidelines looking for levels to de-dollarize and diversify away from US assets.
Key Movers
ECB Governing Council member, Mario Centeno, said yesterday that he is very worried about the European economy’s growth prospects and argued that inflation will not be at 2% without growth. “We need a stronger economy to be compatible with 2% inflation, that is my main position.” The euro was up a modest 0.2% yesterday and focus will now shift to broader themes and market sentiment. Headline risk will continue to be driven by geopolitical developments and markets will be keenly awaiting a speech by ECB President, Christine Lagard, later today.The Bank of England’s more hawkish recent turn has not been endorsed by data so far as jobs, growth and now inflation figures have come in on the soft side. When one considers the GBP/EUR exchange rate there are few arguments to suggest we will not see continued Sterling weakness. Geopolitical risk harms the pound significantly more that the euro and when one couples that with weaker UK data it is reasonable to expect continued weakness for the exchange rate with a move toward the 1.1600 area.
The Federal Reserve left borrowing costs unchanged at 4.25-4.50% as was widely expected by markets. In a statement yesterday evening Fed Chair, Jerome Powell, said “that the economy continues to expand solidly and that unemployment remains low and labour conditions continue to be firm.” The committee noted that “ it is attentive to risks on both sides of its mandate,” (growth vs inflation). This suggests that Federal Reserve policymakers are still considering two 25 basis point rate cuts this year, which is in line with market expectations.
Expected Ranges
- GBP/USD: 1.3380 - 1.3430 ▲
- GBP/EUR: 1.1670 - 1.1720 ▲
- GBP/AUD: 2.0705 - 2.0755 ▲
- EUR/USD: 1.1440 - 1.1490 ▲