Will Fed Be Hawkish?

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Market Drivers June 13, 2018
UK Core PPI misses
EZ IP misses – all eyes on the Fed
Nikkei 0.38% Dax 0.14%
Oil $64/bbl
Gold $1294/oz.
Bitcoin $6500

Europe and Asia:
GBP UK PPI Core 2.1% vs. 2.4%
EUR EZ IP 1.7% vs. 2.8%

North America:
USD PPI 8:30
USD FOMC 14:00

The dollar was mildly bid in quiet pre-FOMC trade today as FX markets geared for the Fed decision due later today 18:00 GMT.

In economic news UK core PPI printed cooler than expected at 2.1% versus 2.4% sending cable towards the 1.3300 level but the pair held bid head of the figure, but still remains vulnerable to further selloffs as prospects of any BOE rate hikes in the near future appear dim.

In EZ the Industrial Production data missed its mark at 1.7% versus 2.8% the period prior, but euro shrugged off the news and climbed to 1.1760 after the Italian bond auction went off without a hitch albeit at much rates. The euro remains well anchored ahead of the ECB meeting tomorrow as markets expect the central bank to provide guidance on the taper of QE despite the instability in Italy as economic growth on the continent overall remains stable.

The focus today, however, lies squarely on the FOMC meeting with markets pricing in the near certainty of a 25bp hike. That would take US short-term rates to 2.00% and make them highest in the industrialized world. Despite the growing interest rate differential gap the dollar was only mild bid ahead of the decision as markets are keen to hear guidance from Mr. Powell and company. US economy shows no signs of slowdown so far and although wage growth remains lackluster, price pressures are clearly building up. Yesterday’s CPI showed a rise above Fed’s 2.00% target to 2.2% and that is likely to keep US policymakers squarely on tightening path with strong possibility of 4 rate hikes in 2018.

If the Fed reaffirms its hawkish stance USDJPY is likely to take out the 111.00 figure and perhaps even gun for 112.00 target as longs press the trade. Only a very cautious FOMC statement would give market pause and push the pair below the 110.00 figure. The more Fed hikes the more carry flows will move into the buck and the pair should continue to move higher as rate differentials kick in.

Boris Schlossberg
Managing Director

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