17/06 – Fed thoughts push dollar higher

Jeremy Thomson-Cook
Jeremy Thomson-Cook 17 June 2021

GBP: Retail numbers tomorrow

EUR: A new issue for the euro

USD: 2 hikes in 2023

Sterling

Sterling is staying out of the way this week but developments in Washington overnight have broken GBPUSD through the low end of the recent trend. Fortunately, this is not the case in GBPEUR which has broken higher as investors have switched their sights from the USD on to the single currency.

UK retail sales tomorrow morning will be crucial for sterling’s chances of regaining the 1.40s.

Euro

Time has not run out on the recent euro move higher but any euro gains in the future are going to have to be harder won given movements overnight in Washington. As above with sterling, we will have to watch local data for a better flavour of just how resilient the euro can be but we do not expect the ECB to stand in the way of these recent losses.

US dollar

Well, we got that wrong. The dollar is stronger this morning after capitalising on some market complacency over just how many interest rate hikes the Federal Reserve expect in the coming two years. Officials at the US central bank expect two rate rises in 2023; previously the first had only been seen in 2024 so this represents a significant pulling forward of expectations.

Chair Powell was also optimistic in yesterday’s press conference noting “There’s every reason to think that we’ll be in a labour market with very attractive numbers, with low unemployment, high participation and rising wages across the spectrum.”

Dollar has strengthened on the announcement, but we have our doubts over the viability of a further rally. The Jackson Hole economic symposium is in August and remains the likely time wherein the Federal Reserve further details its plans for reducing stimulus but 2 months is a long time in these markets.

Instead of broader USD strength we expect to see EUR and JPY weakness come to fore; the carry trade is still alive and well, but the dollar will no longer be sold to fund it, limiting USD weakness.

Elsewhere

We have long held NOK as a currency to watch in 2021 and higher oil prices and a recovering economy may lead the Norges bank to offer thoughts on rate hikes at its meeting today. We expect the meeting to be broadly positive and drive further NOK gains.

Market rates

Today’s interbank rates at 08.56 against sterling. Movement vs yesterday.

Euro €1.169 ↑
US dollar $1.396 ↓
Australian dollar $1.835 ↑
South African rand R19.58 ↑
Japanese yen ¥154.6 ↑

Have a great day.