Hawkish FOMC minutes showed most Fed officials believed a rate hike in June is likely if the economy supports it. EURUSD dropped to 7 weeks low.
As usual, markets tend to react more in situation it failed to anticipate or expect. The FOMC meeting minutes saw most Fed officials feeling a June rate hike is likely if the economy growth warrants it. This is definitely nowhere close to what the markets have priced in, a near zero chance of a June rate hike, prior to the release of the minutes. After the release of the minutes, the chance of rate hike in June soared to more than 30%. Even though the chance has rose, a 30% chance is still indicating “less likely to hike”. It will be tricky for Fed to time the rate hike as UK is having “Brexit” referendum in June and US has presidential election in November. From now until June’s meeting, US will release manufacturing, prelim GDP, consumption and jobs data. Markets are likely to look at these data to adjust their prediction on June’s rate hike. Further increase in the probability will strengthen the dollar even more.
The Sterling had a good week; it ended the week higher against all its counterparts. We saw the Sterling going through some roller-coaster ride. In the first half of the week, fresh polls showed growing support to the “Bremain” camp and drove the Sterling higher. However, in the later half, an online poll showed the other side of the story and drove the Sterling lower. We expect the Sterling will continue to be pulled along by the tug-of-war between “Bremain” and “Brexit”.
G7 meeting in Japan ended over the weekend. The Finance chiefs expressed their concern over global growth and reaffirmed their pledge not to weaken their currencies intentionally. In a meeting with US Treasury Secretary, Japan’s Finance Minister Taro Aso voiced his concern over one-sided speculative move on the Yen. “I told him that one-sided, abrupt, and speculative moves were seen in the FX market recently, and abrupt moves in the currency market are undesirable and the stability of currencies is important,” Aso told reporters. We do not foresee the G7 will deter Japan from weakening their currency if the need arises.
Some focus should return to the Euro as we will see the latest German Zew Economic Sentiment and Ifo Business Climate this week. UK will have their Inflation Report Hearings and Second estimate of their GDP, “Brexit” concern is likely to continue to dominate the Sterling rather than data. The US Core Durable Goods and Prelim GDP should give us more clues to the likelihood of June rate hike. With the rising oil prices, Bank of Canada will probably keep its rate unchanged and continue with their optimism.
Our Picks
AUDUSD – Downtrend to continue. AUDUSD has been on a downtrend, as long as rate cut is still on the table, the downtrend should continue.
CADJPY – Slightly bullish. Bank of Canada is expected to keep their interest rate unchanged and we expect their optimism to remain as well.
WTI Oil – Range bound. OPEC meeting is in June. If further reduction in US inventory is shown on Wednesday, WTI could push higher.
Top News This Week
Europe: German ZEW Economic Sentiment. Tuesday 24th May, 5pm.
We expect figures to come in at 12.3 (previous figure was 11.2).
Canada: Overnight Rate. Wednesday 25th May, 10pm.
We expect figures to remain unchanged at 0.5% (previous figure was 0.5%).
US: Prelim GDP q/q. Friday 27th May, 8.30pm.
We expect figures to come in at 0.7% (previous figure was 0.5%).
Fullerton Markets Research Team
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