Dollar is King (again)

The dollar chalked up broad-based gains last week with most of its advance following Wednesday’s more hawkish than expected Fed meeting. The central bank said it was “unambiguously committed” to meeting its 2% inflation target, prompting the market to price in an additional 20bps of rate hikes by the end of this year. Oil prices nudged up and bond yields rose on Friday following the abrupt postponement of peace talks between the US and Iran. However a first round of negotiations did eventually take place yesterday and concluded with “encouraging progress”, pushing oil prices back below $80 p/b again. Meanwhile, in the UK, it is being widely reported that Keir Starmer will this morning outline a timetable for his departure, which could pave the way for the coronation of Andy Burnham as Labour Party leader and Prime Minister. Sterling is trading at around $1.32 against the dollar and at about £0.8675 versus the euro, not much changed from Friday morning’s levels. The euro is hovering just north of $1.1450 against the US currency, having shed more than a cent over the past week or so.

In government bond markets, German and UK yields backed up on Friday, increasing by 4-8bps across the curve, but they were flat to only very marginally higher over the week as a whole. US 2-year yields rose by circa 10bps on the week, largely on the back of the ‘hawkish’ Fed meeting, but benchmark 10-year yields ended a few basis points lower. In equity markets, European stocks lost ground on Friday but advanced over the week overall. In a holiday-shortened week in the US (markets were closed on Friday), the S&P 500 gained almost 1%.

ECB member Escriva says the central bank needs to “remain agile and take (interest rate) decisions on a meeting-by-meeting basis,” noting that there is a “high degree of uncertainty around the inflation outlook for the coming months and quarters,” including the “extent to which indirect pass-through effects could make inflation pressures more persistent or eventually lead to second-round effects on wages.” The market is currently pricing in another 25bps increase in the deposit rate by October.

Looking to the week ahead, it is relatively quiet in terms of economic data. Flash PMIs for June are due in the main economies tomorrow (Tuesday), while PCE inflation for May is scheduled in the US on Thursday. The latter is expected to show headline inflation accelerated to over 4% last month according to the consensus forecast, more than double the Fed’s 2% target. There are a number of central bank members scheduled to speak over the course of the week, including ECB President Lagarde at the European Parliament today