USD remains bid after Warsh's first FOMC meeting as Chair

Good morning

Seven BoE members voted to keep rates unchanged yesterday, while two members, Pill and Greene, voted for a rate rise in a move they say would be proactive.  Bailey is happy with policy where it is for now, BoE do insist they are ready to act if appropriate, but the recent peace deal with Iran and the lower oil prices that brings is enough for some to lower their BoE rate forecasts.  HSBC have changed their forecasts from previously two hikes, one each in July and September, to no change at all in 2026.  They even see the next move in rates is likely to be lower although we’ll have to wait until late 2027 according to them.

UK retail sales this morning looked quite upbeat not only surprising to the upside this month but also with upward revisions to last months pretty dismal set of numbers.  Some are putting the higher spending down to a spell of good weather, if that’s the case then June data should be decent as well, it was already scorching hot on my early morning walk with the dog today and its only going to get hotter next week with temperatures forecast to get to the mid 30’s. 

In other UK news, Andy Burnham won a decisive victory in the Makerfield by-election which opens the door for his Labour party leadership challenge.  Burnham made some market-moving comments before he became and MP so it is possible his victory and potential role as PM could spark a bit of volatility.  For now, GBPUSD is down at 1.3200, more a sign of USD strength with EURUSD now 1.1445 but GBP continues to suffer most, the GBP crosses sees the pound trade at 1.1530, 1.8830, 2.3000 and 213.00 against EUR, AUD, NZD and JPY.

USDJPY is currently 161.30, just 50 pips or so off the July 2024 highs which triggered large-scale intervention that took the pair down to below 142.00 in the space of three weeks or so.  We’ve already seen that Japan are willing to intervene again, their action at the end of April confirms this, but it is not clear where their line in the sand will be.  Fighting a strengthening US dollar will be a tough game to play and would surely need coordinated action rather than Japan acting on their own.

In other news, I see that Qantas will be offering non-stop flights from London to Sydney in just over a years time.  The journey will take around 20 hours, that’s a long time on one aeroplane and I’m sure it won’t be for everyone.  Mind you, the specially designed long-distance plane will have areas for wellbeing and exercise, reducing the number of seats available so I’d expect fares to be high. 

TO sport now and England are making hard work of the test match against New Zealand who managed a very respectable 391 all out and have England on the ropes at 222/6.  We’ll need some amazing work from our tail enders if we are going to get close to the Kiwi’s first innings total. 

In golf, the US Open has started.  US PGA winner Aaron Rai has been unable to repeat his performance ending on +4, Justin Rose who recently converted to McLaren irons is only a little better at +3, I wonder if he is ruing that decision.  OK, they look cool, but they need to work!   Wyndham Clark leads the field at -6, McIlroy is -1 and Scheffler is down at +2.  Never write him off mind you. 

Plenty of world cup action over the weekend as well as we move into the second round of group matches.  If I’m honest none of the fixtures are ones I’d drop everything to watch and with the timings of the kick-offs it’s not even as though its something to do if the heat outside becomes unbearable.  New Zealand play in the early hours of Sunday morning, if I read correctly they have not lost a world cup match since 1982.  There’s one for the pub quiz.

Not much on the calendar today but with US/Iran peace deals, possible Labour leadership battles and potential intervention from Japan we can’t take it easy just yet.  Next week brings some decent data with CAD and Aussie CPI, global PMI’s, Aussie employment and the biggest one of the week, the US core PCE numbers, still a major announcement even if Warsh would prefer to move away from this particular indicator.

Have a great day, and great weekend as and when it come…

-  11.15 ECBs Cipollone speaks

-  11.30 ECBs Elderson speaks

-  13.30 CAD retail sales

-  15.30 ECBs Lane speaks

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

Lower than expected UK inflation should see BoE keep rates unchanged

Good morning

We had a slightly mixed bag of UK inflation numbers this morning.  CPI was a touch lower than expected with a headline of 2.8% and core at 2.6%, while PPI and RPI were a little firmer if we include upward revisions to last months readings.  All in all though, a fairly benign set of numbers that shouldn’t encourage BoE to do anything other than keep rates on hold tomorrow, particularly as the CPI readings were well below those forecast by BoEs own staff.

GBPUSD was up around 1.3430 before the release but dropped a few points to 1.3410 while GBPEUR which had been testing up to 1.1600 earlier in the week has dropped to 1.1555.  Other GBP crosses such as GBPAUD, GBPNZD and GBPNZD are all pretty much unchanged at 1.9000, 2.3050 and 215.00 respectively.

Oil prices continue to adjust lower with Brent and WTI now $78.15 and $74.60, well down from their March peaks around $120 at the start of the Iran war.  Plenty rides on this peace deal getting signed later this week and then of course it must be adhered to. While we are on the subject of war and peace, I see Russia opened fire on a yacht in the English Channel yesterday.  There is a difference of opinion as to the events surrounding the incident, Russia insists the yacht was drifting too close to their frigate while the couple on board the yacht said they were definitely not on a collision course. 

This evening we will have the FOMC rate announcement, the first such meeting to be chaired by Warsh.  As Trump’s choice, he is likely to be on the dovish side although recent events have made it difficult to argue the case for a rate cut, with inflation too sticky and the US labour market strong.  We know he prefers alternative inflation counting measures such as trimmed mean over the usual CPI and core PCE but whether other members will join him in this view remains to be seen. 

In summary, Fed rates to remain unchanged, Warsh’s statement will be the main area of interest.  I’m midly inclined to look at some cheap, short term downside USD plays just in case he does come out more dovish than expected, for example an overnight 1.1625 EURUSD call costs around 20-25 usd pips.

We’ll have EU inflation and US retail sales data released today but I’d be surprised if that brings much in the way of volatility.  FOMC the biggest deal, but NZD watchers should note NZ GDP numbers out tonight.  UK employment data will be released early tomorrow morning.

So, onto football.  England’s big day is here as they take on Croatia in their first world cup group match this evening.  I must confess I had been feeling confident that England would do well in this tournament but we’ve already seen some strong performances from other teams and I’ve lost a little bit of that confidence.  France beat a plucky Senegal team yesterday, Messi scored all three goals in Argentina’s win over Algeria and Haaland knocked in a couple of goals for Norway in their 4-1 win over Iraq.   Still, England are firm favourites to win this evening, let’s hope the bookies are right!

Have a great day…

-  10.00 EU HICP

-  13.30 US retail sales

-  14.00 ECBs Sleijpen speaks

-  15.00 US pending home sales

-  19.00 FOMC rate announcement

-  19.30 FOMC press conference

-  23.45 NZ GDP

-  07.00 UK employment