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Global Central Banks Remain The Focal Point For The Market

By OFX

Focus yesterday was centered firmly on the US as the Fed raised interest rates to 2% which saw the USD rally across the board. The US economy has remained healthy which has led to the central bank shifting to a more hawkish outlook and moving away from their crisis-era guidance. Markets will now expect a further two rate hikes in 2018 and three more in 2019 with the probability of a September hike now sitting just above 80%. The Fed also revealed they are not overly concerned with inflationary pressures to the US economy as they state they are content with having inflation remain over the 2% target until 2020.

In other news, we will see “Trade War” discussions move back into focus as the week draws to a close. Trump is due to release his final plans for tariffs on Friday with the primary resistance likely to come from China. This could lead to uncertainty being brought back into markets and investors may look to take a risk-averse approach to investment which could see safe-haven currencies rally towards the weeks close.

Canada’s Foreign Minister Chrystia Freeland spoke yesterday after receiving a Diplomat of the Year award from Foreign Policy Magazine. Freeland was very diplomatic in her address hardly mentioning trade and rifts between Trump and Trudeau. What Freeland did do was emphasize the importance of international order and that Europe, Asia, Africa and the Americas stand together with Canada. Freeland also added, “We all know we will be strongest with America in our ranks.”

The Canadian dollar has seen some significant volatility overnight, but well entrenched in the range of 1.2945 – 1.3035. Crude oil has supported the petrol currency with a 0.63% spike in WTI crude oil prices following the weekly inventories report that showed a higher than expected draw in US stockpiles.

The Euro retreated off the back of yesterdays Fed rate hike as attention turned to today’s ECB statement. Focus remains on the central bank's plans to withdraw from their Quantitative Easing program. Tapering will begin in September with QE ending in December.

The ECB reaffirms interest rates will remain unchanged through to the middle of 2019. With little economic data of note to discuss today, the movement has been motivated by central bank comments, and we are seeing the euro remain under pressure against its counterparts

The only notable release from the UK yesterday came in the form of annual CPI figures, which held firm at 2.4%. This reaffirmed the markets view that inflation remains an issue for the UK economy moving forward, putting further pressure on the BOE to intervene.

Attention quickly turned to the Fed rate decision last night which saw the US central bank raise rates to 2% causing the pound to retreat initially before rebounding. The latest run of retail sales figures was released this morning at 9:30 and came in well over forecast at 1.3% which caused the currency to strengthen across the board. We could see the pound strengthen further throughout today’s trading following this morning’s releases. Movement has been heavily motivated by central bank announcements from the ECB stating QE will end in December and later tonight the BOJ.

The Australian dollar opens this morning mostly unchanged when compared with the same moment yesterday yet enjoyed wildly varied fortunes through trade on Wednesday. Having maintained a tight 30-point trading band for much of the domestic session, the Aussie crept higher and moved back through 0.7600 shortly after London’s open, gathering momentum into the Fed’s FOMC statement and touching intraday highs at 0.7610. The AUD then tumbled losing almost a cent as the Fed announced a 25 basis point increase in benchmark interest rates forcing the AUD to lows at 0.7532. The knee-jerk reaction was then gradually unwound as investors responded to the commentary delivered in the accompanying rate statement.

While flat over 24 hours we still maintain medium and long-term downside risks for the AUD are in play. Having signaled the possibility of 2 more rate amendments before years end and hinted at three rate hikes in 2019 the US Dollars yield advantage over major currency counterparts is only expected to grow. The RBA is still some way of raising domestic interest rates, and while broader economic signs are positive the lag in wage growth, labor market slack, and inflation expectations are expected to continue through the short term making it increasingly difficult for the board to justify a rate hike. With short-term ranges expected to fluctuate between 0.74 and 0.77, we will be looking to a possible moderation into years end back toward the lower end of this handle.

The New Zealand Dollar remained resilient in overnight trading to open this morning at 0.7028. Range bound between 0.6975 and 0.7050, the market enjoyed a period of turmoil as the US Federal Reserve hiked rates during the FOMC session. While widely expected, and indeed priced in by markets, investors underwent a course of price discovery, taking into account a hawkish statement from the Federal Reserve.

Across the Tasman, the Australian Dollar also remains relatively unchanged against the Kiwi with only a slight uptick to 0.9270. All other crosses have been relatively insignificant with little to write home about.