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Timothy Fox - Head of Research & Chief Economist
Mohammed Al Tajir - Manager, FX Analytics and Product Development
Published Date: 16 June 2019
Trade tensions and geopolitics are continuing to be the main drivers of markets, causing interest rates to sink and oil prices to gyrate with the USD staying firm. Policy meetings in the coming fortnight at the Fed and at OPEC may succeed in calming some of these extreme moves, but for how long is uncertain.
That markets have begun to price in significant easing from the Fed this year owed much to the unpredictable nature of U.S. tariff policy under Donald Trump, disrupting global supply chains and creating business uncertainty across continents. Comments from the Fed show that they are increasingly sensitive to the downside economic risks associated with this, and could be poised to start easing monetary policy soon. They also show a Fed under pressure from the White House to cut rates, a factor that in the end could hold them back from doing so. Ahead of last Friday’s U.S. retail sales and industrial production reports markets were pricing in a near 90% probability of a rate cut at or before July, with more to follow over the rest of the year. However, in the wake of stronger than expected data, which saw sales rise by 0.5% and production by 0.4%, it seems unlikely that this will happen at this week’s FOMC meeting with September probably being the earliest that a rate cut might be countenanced.
The upcoming FOMC meeting on 18th-19th June will however likely show the Fed becoming more dovish, with the new dot plot projections expected to show no change in the target rate in either 2019 or 2020, versus a prior assumption of a quarter point hike in 2020. Some estimates may also show some officials favoring a rate cut this year. So the pause in easing expectations is only likely to be temporary, with any failure at the upcoming G20 meeting to conclude a trade deal between the U.S. and China likely to quickly bring downside economic risks back into focus and rate cuts back on the agenda.
The USD therefore is likely to brush off an unchanged Fed outcome for now, especially with other central banks like the BOE and the BOJ expected to keep policy rates steady as well. The focus for GBP will be on the second round of the Conservative Party leadership contest, which will take place on Tuesday, with Boris Johnson clearly in the lead after the first round. For the EUR comments from President Draghi at an ECB conference at the start of the week will be watched carefully for more dovish leanings, as will the ECB's economic report, which will contain a more detailed assessment of the latest forecasts.
Source: Emirates NBD Research, Bloomberg
USD sells off on rate cut expectations
Risk assets recover on trade truce
Markets to focus on ECB policy meeting