• Rates: US Treasuries limit losses despite the Fed’s message
    The Fed hiked its policy rate to 1.75%-2% while median rate forecasts for 2018 and 2019 increased, suggesting a quarterly rate hike pace at least until mid-next year. Strong growth and a positive outlook support this scenario, while inflation is allowed to temporary move above the symmetric 2% target. US Treasuries took the news quiet well, limiting losses.
  • Currencies: Dollar doesn’t profit from ‘hawkish’ Fed. ECB to propel the euro?
    The dollar couldn’t maintain modest gains yesterday as the Fed raised its policy rate. Powell also suggested that more is to come. The focus turns to the ECB today. The ECB will probably prepare markets for the end of APP at the end of this year. This symbolic move to policy normalization might support further euro gains.

The Sunrise Headlines

  • The US equity markets reacted negatively to the Fed news, with the DOW JONES leading the pack lower (-0.47%). Asian markets follow the US example and open with losses of around -0.50%.
  • The Federal Reserve has without surprise lifted rates by a quarter point to 1.75%-2% and signalled that two more interest rate hikes are expected in 2018. FED chairman Powell supported it with a bullish assessment of the US economy.
  • China’s new economic numbers indicate a slight setback in economic momentum. Retail Sales YoY (8.5%), Industrial Prodution YoY (6.8%) and Investment (6.1%) were below the expected the 9,6%, 7% and 7% in May.
  • The US has released the list of products that it imports from China that will be targeted for tariffs, for a total value of $50bn. The move came despite China’s pledge to buy $70bn in US farm and energy exports.
  • Greece has accelerated it’s reform debate to pass measures for receiving a final tranche of international bailout funds. It said to be preparing the country’s exit of the stability support programme.
  • Australia created 12k jobs in May (19k expected), mostly by increases in part time jobs (+32k). The RBA remains concerned with the only marginal increase in average wages and a high household debt to impose risks on its economy.
  • The US will release its weekly update on Jobless Claims today together with its Retail Sales for May. In the UK the Retail Sales Ex Auto Fuel MoM/YoY (May) are given. In the EU, it is looking forward to ECB’s announcements.

Currencies: Dollar Doesn’t Profit From ‘Hawkish’ Fed. ECB To Propel The Euro?

Dollar doesn’t profit from ‘hawkish’ Fed rate hike

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The dollar traded with a cautious negative bias yesterday going into the Fed decision, with EUR/USD nearing 1.18. USD/JPY eased to the mid 110 area. The Fed as expected raised the Fed fund target range by 0.25%. The dots suggest two additional rate hikes this year and Fed’s Powell remained positive on the economy. On the other hand, Powell reiterated that the inflation target is symmetric and that policy shouldn’t react to short-term deviations from target. Yields and the dollar spiked temporary higher upon the Fed decision, but the gains couldn’t be sustained. EUR/USD closed the session at 1.1791 (from 1.1745). USD/JPY finished the session little changed at 110.34 after a temporary post-Fed trip towards the 110.85 area.

Asian stocks mostly show moderate losses overnight. Disappointing Chinese data and a moderately hawkish Fed yesterday are weighing on regional markets. The dollar also fails to capitalize on yesterday’s hawkish Fed message. EUR/USD returned to the 1.18 area. USD/JPY eases back to the low 110 area. The Aussie dollar continues trading soft (AUD/USD 0.7560 area) after mediocre Australian labour market data.

US retail sales and import prices will be published today. Retail sales are expected solid (0.4% M/M) and import prices will probably maintain an upward trajectory. However, a big surprise is probably needed to trigger a USD reaction with the Fed rate hike path more or less cemented. The dollar might be more sensitive to weaker rather than to strong data. Still, the focus will be on the ECB.. We expect the ECB to prepare markets to stop APP end of this year. This might cause a further repositioning in favour of the euro. Over the previous days, we held the working hypothesis that the downside of EUR/USD had become better protected even with a more hawkish Fed. We maintain that view. A return of EUR/USD below 1.1510 has probably become difficult. First resistance in EUR/USD stands at 1.1830/40. A break would open the way to the 1.20 area.

Sterling traded with a slightly negative bias (against the euro) yesterday as UK CPI remained soft an as Brexit noise persisted. May retail sales are expected to rise modestly (0.3% M/M core). We maintain the view that a substantial positive surprise is needed to support a sustained rebound of sterling. Brexit uncertainty persists. We expect EUR/GBP to hold in the upper part of the 0.8700/0.8850 consolidation pattern.

EUR/USD: will ECB propel euro beyond 1.1830/40 resistance

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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