FX Markets Monthly Outlook – June 2018

The euro currency posted declines for the second consecutive month with the pace of declines accelerating further. The common currency fell to fresh yearly lows. The declines came following the developments in Italy and a broad slowdown in the economic activity in the Eurozone.

The U.S. dollar continued to post gains amid improving economic fundamentals and the fact that during the May FOMC, the Federal Reserve suggested that it is on track for its second rate hike this year in June.

Although the Fed had left interest rates unchanged in May, it was certain that officials were eyeing for the next rate hike in June. In May, the FOMC also revealed that it was willing to tolerate an overshoot of inflation for the short term, calling it “symmetric inflation.”

This managed to soothe investor concerns who expected to see the Fed responding with faster rate hikes.

On the commodity front, oil prices rose to fresh 4-year highs. The gains came after the U.S. administration announced that it was pulling out from the Iran nuclear deal and would follow through with stricter sanctions on the Iranian regime. Still, a bit of uncertainty remains especially after the remaining parties to the nuclear deal vowed to continue supporting the nuclear accord.

The month ahead: June 2018

The month of June will see the Federal Reserve and the ECB monetary policy meetings standing out. On one part, investors are bullish on the interest rates in the U.S. while the prospects of an exit from QE, by September 2018 from the ECB still remain questionable.

Overall, the markets will be heading into the final month of the second quarter this year. Here’s a quick preview of the main events to look forward to in the month of April.

FOMC – Second rate hike in June

The U.S. Federal Reserve Bank will be holding its monetary policy meeting on June 12 – 13^th. Investors are certain that the central bank will be hiking the Fed funds rate from the currency 1.50% – 1.75% to the new window of 1.75% – 2.0%.

This marks the second rate hike for the year. The Fed officials had previously maintained that they forecast three rate hikes in 2018. However, a second rate hike in June could potentially increase the probability of an additional rate hike this year, bringing the total rate hikes to four.

The FOMC meeting will be followed by a press conference as well and includes the quarterly economic projections. With the first quarter GDP posting growth of 2.3%, the U.S. economy is seen stronger compared to other G7 economies.

Investors will be paying attention to the Fed’s statement and the press conference that will be held later by the Chairman, Jerome Powell. Powell is likely to maintain the status quo and also remind the markets about the Fed’s tolerance on inflation.

Latest data put the Fed’s core PCE index or inflation closer to the 2% inflation target rate. With higher oil prices and a broadly stronger U.S. economy, investors are bracing for inflation to breach the 2% inflation target by the third quarter of this year.

ECB to take a cautious tone

The European Central Bank will be holding its monetary policy meeting on June 14^th. The ECB’s meeting comes just a day after the Federal Reserve’s monetary policy meeting and will no doubt bring volatility to the currency markets.

Given the recent slowdown in the Eurozone’s economy it is expected that the ECB will strike a cautious tone especially in the backdrop of the political uncertainty in Italy. This is likely to keep officials to give a guarded response.

At the same time, officials are likely to strike an optimistic tone on the economy. The recent first quarter slowdown in the economy is likely to be brushed aside raising the prospects that growth could potentially return by the second quarter.

Investors will be watching for any clues on the ECB’s Quantitative Easing program which is expected to end in September this year.