Weekly market overview June 17 - 21.
Financial markets have gone crazy in the third trading week of summer. The main fundamental driver - U.S. Federal Reserve’s meeting, interest rates decision, economic statement and Chairman Powell’s press conference - had a dramatic impact on major assets and investors’ sentiments. While equities investors lifted U.S. stock indices to all-time highs, financial institutions and individual traders started pricing in enormous liquidity, getting rid of cash USD, and buying any asset as an alternative to falling greenback. Markets were affected by FOMC dovish rhetoric and talks about even two rate cuts this year sent U.S. 10-year Treasury yields to the lowest value since November 2016, gold price surged to six-year high above $1411 per ounce, WTI Crude oil price soared almost 10%, while the dollar index dropped 1.39% versus the volume-weighted basket of six major currencies. Even the crypto market capitalization jumped by $50 billion on the back of anti-dollar flows across the board.
Three months ago, Fed Chair Powell had a completely opposite opinion on the monetary policy despite strong political pressure from Trump’s administration, requiring to cut the interest rates and weakened the greenback. The White House had successfully pushed the regulator to change policy as 8 out 17 voting members of the Federal Open Market Committee favoured a rate cut this past Wednesday, while the 2 of them were insisting on a rate cut in March. What’s more, 7 out of those 8 guys voted for a cut by 50 basis points or two cuts by 25 bp as early as possible. The official statement included concerns over the business investment, manufacturing and industrial production, while the GDP growth projections were revised up (!) and the labour market was considered as robust. The Fed officials removed the word ‘patient’ from the statement, underlining the readiness to act as early as in July during the next meeting.
Softening financial conditions could help the corporate sector to boost investment capital expenditure, which was immediately priced in by the equity market. S&P 500, for example, finished the trading week at 2946.1 points for the first time ever, adding another 1.79% to its value. At the same time, U.S. government debt became less attractive compared to other regions as real yields already dropped from 3.25% in November to 1.975% this June. The Fed promised a much higher level of liquidity, making the borrowing capital as easy to access as at the beginning of the tightening cycle started in 2015. In the foreign exchange market, the greenback had lost the most value versus the Swiss Franc (-2.25%), Euro and Canadian dollar. All of the six major currencies jumped in the wild price action despite several dovish factors in those regions. For instance, the Reserve Bank of New Zealand is in the softening cycle as the local economy is slowing down, however, the Kiwi added 1.50% to the exchange rate versus the greenback this past week.
It’s not hard to imagine frustration from other central bankers across the globe. European Central Bank President Mario Draghi stated several times this spring that the U.S. Federal Reserve, like any other central bank in the world, must remain an independent monetary policy institution, and political pressure must not influence its decisions. Draghi gave a speech this past week as well, trying to limit the gains for the single European currency, which could hurt exporters and producers. He reminded about a slowing economy in the Eurozone and the need for more supportive measures in the form of TLTRO credit programme. European macroeconomic data was soft this past week. German PPI dropped, ZEW current sentiment fell, EU CPI grew slower than expected, EU manufacturing PMI appeared below 50 points for the third consecutive month. However, that did not stop bulls from lifting EUR/USD to 1.13688, the highest rate since March 22. Of course, Friday’s German and French PMI reports helped, but the main reason for that price action was the greenback’s weakness after dovish Fed.
The Bank of Japan also had the interest rates decision meeting this past week. Although the regulator admitted negative influence from worsening geopolitical conditions and stated that the third largest world’s economy is in a bad shape due to falling exports volume, policymakers had nothing to do but wait and see how deep the market would push USD/JPY. The BoJ officials expressed readiness to step in with interventions if the exchange rate would break the crucial support level, and technically speaking, the regulator would not move a finger before USD/JPY reached the local bottom of 104.82. The pair lost 1.14%, testing the support at 107.00 yen per dollar, but bouncing 30 pips higher on Friday. The overall sentiment is still negative for the pair, and upcoming macroeconomic data would help the bulls to recover those losses quickly.
Another major central bank to surprise traders was the Bank of England. Although the recent macroeconomic data was rather mixed than strong, and this week’s reports showed the same tendency, the Monetary Policy Committee talked about the need for … a rate hike. British Consumer Price Index came in line with the market consensus, Producer Price Index edged slightly higher, while Retail Sales dropped on annual basis. However, the regulator indicated a possible start of the tightening cycle as the interest rates are still at historically low levels. The only concern holding the BoE is the Brexit uncertainty as British politicians failed to find a clear path to solve the situation yet. Some of them were talking about another Brexit referendum. If it was able to cancel the result of the previous one, the Sterling would fly sky-high like a rocket. So far, even the weakest currency recently - GBP - bounced off the local bottom at 1.2506 versus USD, and charted a bullish engulfing on the weekly timeframe, closing the week at 1.27437 (+1.22%), the highest rate since early May this year. Another interesting week is ahead for the British Pound as if the bulls lifted GBP/USD above 1.2828 resistance, the door to complete the bullish reversal pattern would be opened.
The Canadian dollar was among the strongest currencies this past week. Two fundamental updates forced traders selling the USD/CAD currency pair, besides the Fed. First, Consumer Inflation jumped to 2.4% from 2.1% year-over-year in Canada in May. That news was comprehended as a hawkish signal for the Bank of Canada, which used to withstand the pressure of hiking the interest rates in the country earlier. Second, WTI Crude price soared almost 10%, finishing the trading week just cents below 89EMA crucial technical resistance. The black gold price was also supported by escalating tensions in the Middle East as Iran shot down U.S. drone worth $110 million and Trump promised to retaliate. If the war threat increased, WTI Crude could jump to $70 in a blink of an eye, while USD/CAD might test psychological support of 1.3000 next week.