02 Jul 2020
Market Brief: Dollar lovin' the summer
The major story in the currency world is the US dollar and its recent strengthening.
|Today's data releases||Key levels|
|13:00||German Inflation data
|13:30||Final relase of Q1 US GDP
|14:30||BoE member Haldane speech
Happy football day or if that’s not your bag, there’s loads of sunshine to be enjoyed so we’re all winners.
The major story in the currency world is the US dollar and its recent strengthening. Yesterday’s the US Dollar Spot Index saw the dollar gain 0.65% against a basket of its major peers, with the largest gains recorded against some emerging market currencies which continue to sell off. It is perhaps a mix of this latter point, decent US data, and the less aggressive trade policy standpoint from the US (more on that below) which is causing said strength. GBP/USD isn’t far off 1.30, while EUR/USD is similarly eyeing up 1.15. You would suspect both will be major resistance levels but we’ll have to watch the price action for clues.
News from the US comes that Donald Trump and Vladimir Putin will hold their first bilateral summit as the leaders seek to reverse a downward spiral in relations. Speaking of Mr Trump, the White House moved forward with plans to impose stricter oversight of foreign investments but chose a less confrontational approach and China wasn’t even mentioned when the decision was announced. In terms of the detail, Trump embraced legislation under consideration in Congress to strengthen the Committee on Foreign Investment in the US, or CFIUS, so it can prevent companies from violating intellectual-property rights of American companies. After Trump appeared to have softened his stance, White House Chief Economic Advisor, Larry Kudlow, told Fox Business that the US was not satisfied with China’s response to US concerns, and that Trump wasn’t retreating. It feels like a lot of hot air for the time being but could well have big consequences down the line. Finally, Central Bank-wise, Federal Reserve Bank of St. Louis President James Bullard was quoted in the Wall Street Journal saying in relation to rate hikes that “There is a risk that we’ll go too far, too fast as a committee”. He added “A misinterpretation of where we are is a distinct possibility,” he says, adding: “That’s why I’m trying to push against faster rate hikes”.
In the UK, we had the release of the Financial Stability Report (FSR) from the Bank of England yesterday with policymakers confirming domestic risks remain at a standard level, with the main risk, unsurprising being Brexit, although it does go on to state that UK banks could withstand a ‘disorderly Brexit’. Whilst UK domestic risks are deemed standard, the FSR does point to material and increasing global risks, notably in the form of US corporate debt, trade tensions, emerging markets and China. Elsewhere in the world, Angela Merkel will arrive for in Brussels for a summit to try and resolve difference amongst EU leaders to resolve the three-year migrant crisis. In addition to this, her coalition partners at home are threatening to take down her government. That combined with Germany’s exit from the World Cup must make for a sad Merkel… Let’s go to the other side of the world now where the Reserve Bank of New Zealand kept rates on hold as expected. In fact, the market sees it as a 90% likelihood that they hold rates where they are until the end of the year.
The day ahead
There’s one thing most of us are thinking about today and it’s not what is going on Love Island this week. For the record, I’m calling for a 2-1 win for England with Lukaku to score first.
Outside of that, we get German CPI at 13:00, European Consumer Confidence at 10:00, Jobless Claims and the last reading of Q1 GDP for the US at 13:30, and two Bank of England members speak at 11:00 (David Bailey) and 14:30 (Andy Haldane). For me, there’s not much in the data or news today and the story will be more focused on this recent bout of dollar strengthen and whether it will continue. Have a good one and we’ll catch up tomorrow.
Thought of the day
The reigning World Champions are out! Yes, Germany arguably the most successful team in World Cup history were sent packing at the Group Stages yesterday after being beaten 2-0 by South Korea. It’s a reminder to everyone that you cannot take anything for granted.
Similarly, in currency markets, it’s very easy to get sucked into the belief that the exchange rate will behave as you expect or as analysts expect. Remaining in the spot market can of course be rewarding when the market moves in your favour, but never take it for granted that something unexpected could happen (akin to Germany being knocked-out after just three games). With this in mind, having a robust FX strategy that looks to protect yourself against adverse moves, yet allows you to participate in favourable moves, might well be worth exploring. Please speak to you
Investec FX dealer today to find out more.