USD up after hawkish FOMC

Good morning

Well let’s start with the main event from yesterday evening.  Not, not the FOMC, I’m talking about England’s world cup match.  A 4-2 win over Croatia is not a bad feat, OK we were expected to win but as I said yesterday I’d lost a bit of confidence since the start of the competition.  Scoring four goals is great, but the defence did look a bit shaky and conceding two goals is a tad worrying.  With Ghana and Panama still to play, England are odds on to progress beyond the group stages.

As for the FOMC, they did keep rates unchanged as expected but the dot plot offered a more hawkish view with half of members seeing a 25bps rate rise, some of those looking for 50bps through 2026 but the spread is mixed and the general feeling is 2027 and beyond will see rates somewhere around current levels.  Only one member, presumably Miran, looked for a cut in 2026.  For now the forecasts suggest the FOMC is split pretty well between doves and hawks.  New Fed chair Warsh, in a very short press conference, mentioned inflation running over target for five years and that change is needed to deal with that.  Raise the target, or change the way inflation is calculated, there are two ways!

The hawkish tone sent USD higher.  GBP and EUR dropped from 1.3400 and 1.1600 against the US dollar to 1.3265 and 1.1480 respectively, while UDSJPY bounced to 160.80, wiping out all yen gains since Japan intervention in late April.  We have since seen USD lose some of those gains but as I type it seems as though GBP is coming off worse, now 1.3290 but in the crosses we are looking at 1.1545, 1.8900, 2.2985 and 213.50 against EUR, AUD, NZD and JPY, all down from this time yesterday.

This GBP weakness comes despite a reasonable set of UK employment numbers this morning which saw the unemployment rate drop to 4.9%, and also ahead of the BoE rate announcement at midday.  They are widely expected to keep rates unchanged, for me the voting pattern will be of interest.  Expectations were that another members would join Pill in voting for a rate rise, but that seems less likely now.  The remaining members should vote to keep rates as they are at 3.75%.  No one is looking for a rate cut.  Today also the Makerfield by-election which could see Andy Burnham returning to Parliament as an MP to then challenge Starmer’s leadership.  It is probably reasonable to think this has had a negative impact on GBP. 

It is reported that US and Iran have signed an interim deal that extends the ceasefire and allows Iran to potentially access frozen assets, while seeing the Strait of Hormuz reopened.  Trump said he’d signed it electronically but there is some doubt as to whether Iran have signed.  I’m not convinced this is going to work.  Iran have already said that only some of the US$300bn investment fund under the MoU will be used for reconstruction and that charges will apply going forward for travelling through the Strait of Hormuz.  Oil prices are broadly unchanged, US equities ended lower and USD higher, the reverse of what we’d expect if a peace deal was signed, but of course the FOMC had a bit part to play in recent market moves.

Other than the BoE meeting there is little on offer today on the calendar.  Overnight we’ll have the latest trade data from NZ, Japan inflation numbers and minutes from the recent BoJ meeting where they raised rates.  UK retail sales are out early tomorrow morning.

Plenty of sporting action to enjoy as well.  Aside from the world cup football, the second test match between England and NZ is in full swing witgh NZ 291/7 at yesterdays close.  England will be disappointed to have let NZ hit that total after having them at 107/4.  Early wickets needed. 

And in golf, the US open begins today.  The tournament is being held at Shinnecock, got to be careful how you say that!  Scheffler is favourite at 7-1, McIlroy second favourite at 12-1.  Aaron Rai, winner of the recent US PGA, is well down the list at over 100-1.

Have a great day…

-  11.00 Bundesbank monthly report

-  11.10 ECBs Elderson speaks

-  12.00 BoE rate announcement

-  13.00 ECBs Cipollone speaks

-  13.30 US philly fed survey, initial jobless claims

-  23.45 NZ trade balance

-  00.01 UK GfK consumer confidence

-  00.30 Japan CPI

-  00.50 BoJ minutes

-  07.00 UK retail sales