The United States Dollar broadly strengthened across the G10 in the overnight session today as interest rate anxieties swung back into the forefront of investors’ minds.
Overview
After the beginning of the week saw largely positive global sentiment, driving riskier assets forward, the international tone shifted through yesterday’s session after Federal Reserve Governor Michelle Bowman reiterated her continued stance that the Fed should keep interest rates on hold for quite some time. She has not taken the possibility of further tightening off the table. Though one Fed speech doesn’t typically turn the tide of interest rate expectations, inflation figures from around the world (admittedly, not from the US as of late) have pushed central bank policy back into focus, and the global trend of resurgent inflation has traders nervous.
The possibility of an international resurgence of inflation is putting substantial pressure on central banks worldwide, as many nations are fighting to either avoid recessionary territory or promote economic growth after several years of sluggish economic activity globally. Canadian CPI yesterday showed a monthly inflation gain of 0.6%, well above the expected 0.3% reading that economists expected, and overnight, Australia painted a similar picture, seeing annualized inflation climb 4%. As most major economies have inflation targets of or near 2%, both these figures are decidedly high and uncomfortable. Markets have been whispering to each other for a few days now of the fear of ‘missteps’ by central banks as economic activity in many nations continues to be sluggish, and it may yet be too early to call these limited data points an actual trend of resurgent inflation, but nonetheless, the pressure is on. It’s still far more likely than not that most G10 central banks will ease at least somewhat this year, but expectations of such easing have come down substantially since the beginning of this year. With just one 25 basis point cut from the Federal Reserve priced in this year, the US is no exception to this shift, but the macroeconomic situation in the US does remain stronger than that of many of its peers, and investors are continually allured by high US yields, especially in comparison to its G10 peers.
There is little on the docket of major economic events today, but tomorrow brings quite a bit of risk to the table for the US – we’re due to see the final Q1 GDP reading as well as the GDP price index for Q1, jobless claims, retail and wholesale inventories, and durable goods orders. Tomorrow evening also brings the first presidential debate between Donald Trump and Joe Biden, yet another risk event likely to bring the US election back into international focus.
What to Watch Today…
- US Q1 GDP Final, Thursday 8:30AM
- US Durable Goods Orders, Thursday 8:30AM
- US Presidential Debate, Thursday
- US PCE Deflator Index, Friday 8:30AM
- UK Q1 GDP, Friday
- Monex USA Online is always open.
AUD ⇑
The Australian Dollar surged as much as 0.6% at one point overnight before falling back to average around a quarter of a percent gain against the USD after inflation data for the month of May showed an annual increase of 4%. Traders immediately began to shift bets on the Reserve Bank of Australia’s August meeting in response – previously thought to be a non-event, there is now a 33% chance, as traders see it, that the RBA will hike interest rates. Though one hot inflation print does not make a trend, global jitters continue to abound surrounding inflation. AUD is the lone G10 currency gaining ground against USD in response.
JPY ⇓
Japanese Yen has, once again, weakened through a key psychological level and is once again placed firmly on intervention watch as traders look to the Bank of Japan to support the beleaguered currency. Japan’s top currency officials have used some verbal cues to show markets they are, in fact, willing to intervene again this week, but it appears that the international market is effectively calling their bluff – after two interventions in late April and early May failed to support the currency outside the short term, it’s unclear just how effective a third round could be.
