Week Ahead: Market reaction to Fed Hike and Dovish ECB

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The U.S. dollar gained against all major pairs this week. A hawkish Fed and a dovish European Central Bank gave the edge to the American currency. Donald Trump scored diplomacy points in Singapore by meeting with North Korean leader Kim. Trade war fears were once again at the forefront as the Trump administration announced new tariffs on Chinese goods on Friday. Oil prices plunged as supply might be on the rise with heavy anticipation on the Organization of the Petroleum Exporting Countries (OPEC) meeting this coming Friday.

·       Major Central Bank Governors to meet in Portugal

·       Bank of England (BoE) expected to keep rates on hold

·       OPEC states its Summit on June 22

Central Bank Divergence Gives USD Edge Over EUR

The EUR/USD lost 1.37 percent in the last five days. The single currency is trading at 1.1606 after the Fed and the ECB both announced tightening monetary policies. The U.S. central bank hiked its benchmark rate as expected by 25 basis points. The dollar support from the Fed did not stop there with more optimistic projections and Fed Chair Powell sharing his confidence in the U.S. economy. The report that the White House was readying the list of tariffs on Chinese goods capped the rise of the USD on Wednesday.

The ECB also made a monumental announcement this week to end its QE program but it was also accompanied by a dovish assessment of the economy by saying that rates will be on hold at least a year. The move is in line with the reality of the European economy, as much as the Fed hike is an endorsement of the pace of the growth of America. Next week will offer more chances for central bankers to spout their diverging views when they meet in Portugal for the ECB Forum on Central Banking.

The tariffs against Chinese goods weighted on the USD on Friday ahead of an economic calendar that will be heavy with central bank rhetoric. U.S. data will be largely absent with building permits and the Philly Fed manufacturing index the stand out indicator releases. The European data calendar looks thin until the end of the week with flash PMI data to give a more forward looking insight into the European economy.
 

Canadian Dollar Lower after Fed and Trade War Concerns

The USD/CAD surged 2.01 percent during the week. The currency pair is trading at 1.3185 after the double whammy of a Fed hike and U.S. trade tariffs. Although the higher duties are not applied to Canada directly the fate of NAFTA remains cloudy. Canadian officials did their best to remind everyone that the deal is still on the table and nudged U.S. negotiators to get back on the table. The biggest hurdle going forward would be the political interference as the preferred window of negotiations is now closed. Mexican presidential elections will take place on July 1, which could mean a new team on the Mexican side.

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The Canadian dollar is near a one year low against the USD. Fundamental indicators have softened north of the American border with manufacturing sales falling 1.3 percent on Friday. Oil prices offered little positive support as the upcoming OPEC meeting on Friday will shape the face of global crude supply. Analysts are expecting higher production, which is not being priced with a tumble in crude.
 

OPEC Meeting will Keep Oil Prices under Pressure

Oil prices fell last week. West Texas Intermediate is trading at $64.90 far from the weekly highs at around the $67 level. OPEC will meet in Vienna on June 22 and ahead of that meeting there are rumors circling about that Russia and Saudi Arabia point to a softening of the production limits. The deal did in fact stabilize prices that were in free fall, but producers are divided on the need to relax the supply limits.

OPEC is divided internally as Iran and Venezuela have had disruptions to their supply and would prefer the group maintains lower levels across the board. Saudi Arabia could find common ground and compromise in a smaller increase.
 

Market events to watch this week:

Monday, June 18
1:30pm EUR ECB President Draghi Speaks
9:30pm AUD Monetary Policy Meeting Minutes

Tuesday, June 19
4:00am EUR ECB President Draghi Speaks
8:30am USD Building Permits

Wednesday, June 20
9:30am AUD RBA Gov Lowe Speaks
9:30am EUR ECB President Draghi Speaks
9:30am JPY BOJ Gov Kuroda Speaks
9:30am USD Fed Chair Powell Speaks
10:30am USD Crude Oil Inventories
6:45pm NZD GDP q/q

Thursday, June 21
3:30am CHF Libor Rate
3:30am CHF SNB Monetary Policy Assessment
4:30am CHF SNB Press Conference
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Monetary Policy Summary
7:00am GBP Official Bank Rate
4:15pm GBP BOE Gov Carney Speaks

Friday, June 22
All Day All OPEC Meetings
8:30am CAD CPI m/m
8:30am CAD Core Retail Sales m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar