Market Review: United States August 2018 Core Consumer Price Index
Economic calendar (highest volatility): 11th September – 14th September 2018:
This month, the United States (U.S) Federal Open Market Committee (FOMC) raised Interest Rates largely as anticipated, bringing up the benchmark rate to 2% from the former 1.75% level. Interestingly while this decision largely met forecast, the tone of the regulators suggest that two more U.S Interest Rate hikes are likely to take place this year. This brought about sustenance in the U.S Dollar's (USD) value and avoidance of a 'sell on fact' currency play, as the formerly vague expectations for four Interest Rate hikes to take place this year has now been largely reaffirmed. The USD strengthened on Friday to 95.34 as U.S. non-farm payrolls surged by 201,000 jobs in August and average hourly earnings increased 0.4%. Strengthening wage growth underscores tight labour market conditions and reinforces the likelihood of a third interest rate increase from the Federal Reserve this year. The USD also maintained gains made against most major currencies. Despite the continuing strength witnessed in the U.S Dollar and the progress made on the trade agreements between the U.S. and Mexico, investor concerns about a possible escalation of the U.S.-Chinese trade conflict held gains in check. The trade war between the U.S. and China continues to intensify, following Trump’s warning on Friday that he was ready to impose tariffs on another $267 billion on Chinese goods, in addition to the $200 billion tariff list that is awaiting his decision. The tariffs on an additional US$467 billion would raise duties on nearly all U.S. imports from China. Besides China, Trump is reportedly set to involve Japan in his trade war after the Trump administration pushed Japan to further open its automobile and agriculture markets as part of efforts to reduce the chronic U.S. trade deficit which drew measured reactions from a Japan. The team here at FintechFX view that this could be a hindrance to the USD's strength moving forward.
Furthermore, the team here at FintechFX view that political risk related issues might deter the rise of the USD as concerns for more aggressive retaliations out of China built in to the currency market, even though the USD was higher than most major pairs this week as the market saw that the U.S. would be better equipped to weather a slowdown in trade than other major economies. Worries of escalating trade wars with neighboring countries like Canada could be a longer-term negative for the USD as currency markets in general, do not favor any forms of trade intervention. Negotiations between the U.S. and Canada are still underway as the two parties seek to come to an agreement on the future of the NAFTA. The talks are expected to continue and could potentially last for weeks. Furthermore, a speech in North Carolina last Friday, Trump took a swipe at Canada by saying that they have taken advantage of the U.S. Trade wars carry a major risk of escalation that could weaken investment, unsettle financial market and slow global economy.
In regards to this week, the team here at FintechFX view the Bank of England and the European Central Bank’s interest rate decision on Thursday to bring about the most market volatility. The team here at Fintechfx also views the release of the Consumer Price Index figure by the Bureau of Labor Statistics on Thursday to affect the U.S. dollar’s value to other foreign currencies as any spike in inflation that would trigger an acceleration of the pace of interest rate hikes by the Federal Reserve. The team also expects the ECB to release their Meeting Minutes reiterating their intention to end its quantitative easing by the end of 2018 and raise interest rates in the second half of 2019.
As of late, the European Dollar (EUD) has largely been affected by two catalyst, notably the U.S. tariffs on China and Brexit. This week, the EUR/USD will certainly be subjected to some degree of volatility given the upcoming European Central Bank (ECB) rate decision. While ECB President Mario Draghi is unlikely to make any rate hike announcements this round, however the meeting will still be watched closely as the ECB will be releasing new quarterly staff forecasts in this meeting. While the recent drop in inflation and trade concerns may push them to paint a more dovish picture, any upgrade or downgrade of inflation and growth forecasts may be indicative of the next moves by the ECB. The team at FintechFX views that this could lead to a continuity of a sell for the EUR/USD.
The GBP/USD has recouped much of its post-Brexit losses in the recent weeks following the improved progress in Brexit negotiations, after being under pressure over the last few months for fear of a no-deal Brexit. Following European Union chief negotiator Michel Barnier’s statement last week that the EU would offer the U.K an unprecedented third-country deal, in the latest development, Barnier has signaled one of the first major concessions from the EU to the U.K. in the Brexit negotiations. The team here at FintechFX views for a "buy on rumour" move to continue to develop pending the Brexit developments. The monthly GDP estimate from the U.K. on Monday, which is expected to nudged higher would also be vital as the main measure of U.K. economic growth. The new monthly figure is expected at 0.2% from June’s 0.1%. Should GDP results appear more encouraging than the estimate, the GBP may receive a small boost, but a worse than expected GDP outcome would push GBP further lower. Hence if a positive GDP outcome is not seen, the team here at FintechFX view the ongoing positive sentiment of the U.S Dollar to sustain.
Source (Charts): https://www.investing.com
Source (Economic Calendar): https://www.forexfactory.com/calendar.php
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