Much quieter week after the data mayhem of the past two weeks – however, what happened over the past two weeks will now form the base of most trading patterns for the foreseeable future and from my perspective, the reactions in currencies, EURUSD in particular, was even more telling as to the direction of trade.
First to the Fed – hawkish going full hawk
The key provisos that Bernanke era put in place are now gone! Being; the promise of ‘gradual increases’ and ‘rates will remain lower for longer’ – no more!
The Fed’s apprehension that inflation will not material and that low spending was a drag – Gone!
In fact, looking at this chart of the economic projection you can see the optimism spreading from the full employment scenario spreading into PCE inflation and core retail sales.
Upped has been the expectations around output with these lines from the statement: ‘Economic activity has been rising at a solid rate…recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly.”
Chairman Powell at his press conference then went full hawk with “the decision you see today, is another sign that the U.S. economy is in great shape. Growth is strong. Labour markets are strong. Inflation is close to target…we are not waiting for inflation to show up”.
Inflation expectations has been the caveat that has allowed the market to under-price rate hikes. With the Fed spelling out that this limitation is gone and it will move rates with the prevailing conditions illustrates why the USD against the EUR and GBP looks interesting.
Secondly the ECB – A ‘dovish taper’ – an oxymoron if ever there was one.
‘Dovishly-tightening’ monetary policy is something that is hard to compute when you think about to it. Until you remember that Mario Draghi is a wordsmith and a ‘gun’ when it coming to taming all sides of the market, geopolitical interests and the zone issues that makes up the EU.
The start of the unwind of the ECB’s bond buying program was a known known and yes coming September this will begin so we are moving away from its ‘whatever it takes’ stance.
However, the reason the EUR looks weak against the USD, is that the first real prospect of actually seeing the ECB’s highly unconventional monetary policy stance (the three main cash rates from Frankfurt) shifting to just an ‘unconventional’ footing is not likely to happen until the ‘summer of 2019’ (this time next year) – that is a dovish taper.
The $1.25 level the pair has been chasing is now officially gone! EURUSD is now chasing $1.14.
OPEC – shifting again
Looking to the week ahead and it will be dominated by OPEC’s Vienna convention starting Thursday. Recent communications from Russia (a non-OPEC member) and Saudi Arabia are that the two major oil exporters will look to unwind supply freezes into the latter half of the year – basically to soak up current pricing in oil markets which are at 3 year highs in some cases.
Now since the November 2016 supply freeze agreement, the overhang in inventories has not only reduced but also fallen into deficit. A positive from an OPEC perspective.
However, supply intervention is a blunt policy tool and their use as a medium-term stability mechanism always gets over run by financial strain or productive constraints. This is in my view is why we are seeing movements on the supply side. The supply deficit does give OPEC scope to move on output while still looking to push prices higher. But I return to the base case which is OPEC is looking to soak up the higher prices for economic and political reasons – expect some volatility in Brent and WTI on whatever is announced.