• Relative interest rate expectations had a crucial impact on currencies during the week. There were increased expectations that the Federal Reserve would cut rates this year, especially with some weak US data releases.
• The ECB also suggested further action was likely over the next few months, but the dollar lost out and the currency index dipped to 3-month lows as investors started to sell the US currency more aggressively.
• US-Iran tensions increased sharply and triggered defensive demand for the Swiss franc and yen while oil prices strengthened sharply and there were still important concerns over US-China trade tensions.
Market News & Highlights
• The US Federal Reserve held interest rates at 2.50%, but there were increased concerns over the outlook and many members expected rates to be cut this year with markets even more confident that interest rates would be cut soon. Comments from Fed officials also reinforced expectations that there would be lower rates.
• US June business confidence weakened with manufacturing sentiment at the lowest level for close to 10 years which reinforced concerns over the growth outlook, although housing data was solid.
• ECB President Draghi reiterated that the bank would need to take further monetary easing if the inflation target was not met on a sustained basis. Euro-zone business confidence recovered slightly for June, but still at subdued levels. The EUR/USD advance to 2-month highs was due mainly to US currency losses.
• The Bank of England held interest rates at 0.75% and was slightly more cautious over the economic outlook.
• The Australian central bank head also suggested further interest rate cuts were likely this year. The Norwegian central bank diverged from other major central banks by raising interest rates.
• Geo-political tensions were important with US and Iran moving closer to military confrontation after a US drone was shot down by Iran, although President Trump called-off an attack and imposed additional sanctions.
• Oil prices increased sharply which supported the Canadian dollar. Underlying geo-political fears also supported the Japanese yen and Swiss franc with demand for defensive assets.
The Week Ahead – What To Look Out For
• US Federal Reserve Chair Powell is due to make a speech on Tuesday and his comments will have a big impact on US interest expectations with the dollar correcting if he does not point to a near-term cut in rates.
• US-Iran developments will continue to have an important impact during the week. Any easing of immediate tensions would curb potential demand for the yen and Swiss franc while military action would increase fears.
• Trade developments will also be potentially important with the G20 holding a Summit late in the week. As well as the overall stance, markets will be focussing on whether the US and China can ease trade tensions with a particular focus on any meeting with President Trump and Chinese President Xi.
• The EU will also hold another meeting in an attempt to resolve differences over key appointments. These appointmrnts will have important medium-term implications for Brexit developments and ECB policy.
• Inflation data will be significant wth Euro-zone data on Thursday and US PCE data on Friday, although growth considerations are likely to have a bigger impact on yields and currencies.
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