Global Themes

The U.S. dollar was little changed in the wake of a historic summit between President Trump and North Korean leader Kim Jong Un. The constructive summit in which Messrs. Trump and Kim signed a pledge to work “toward complete denuclearization of the Korean Peninsula” was reassuring to markets. Defensive safe havens like the yen underperformed with the Japanese currency hitting a three-week low against the greenback. The euro and sterling were flat while the Canadian and Mexican currencies remained pressured by trade uncertainty. Market reaction was limited to the Singapore summit given the parade of big events over coming days. On tap today is the start of the Fed’s two-day meeting and influential data on U.S. consumer inflation. The Fed is expected to announce a rate hike tomorrow, its seventh since late 2015. The ECB follows the Fed with a policy decision Thursday, then it’s the Bank of Japan’s turn Friday.


The euro was mostly flat Tuesday after the Trump-Kim summit and ahead of high stakes central bank decisions this week on both sides of the Atlantic. The euro rallied to two-week highs last week after political risk in Italy abated and members of the ECB indicated that officials would use their June 14 meeting to discuss how long to maintain its monthly bond buying stimulus. Upside for the euro was capped by a survey showing the gloomiest morale among German investors in 6 years in June. 


Canada’s dollar loitered near March lows against the greenback, still reeling from the contentious conclusion to the weekend G-7 meeting in Canada that heightened trade uncertainty between the neighboring nations. So far, downside risk for the loonie has proven limited with odds narrowly favoring a Bank of Canada rate hike from 1.25% as soon as next month. An absence of meaningful data from Canada this week puts added emphasis on U.S. numbers and the Fed’s policy decision Wednesday when it is expected to raise rates and indicate how many more times it intends to move this year.


The peso steadied near 16-month lows, benefiting at the margin from markets’ positive response to the friendly first meeting between the leaders of the U.S. and North Korea. The peso remains on fragile footing amid heightened expectations for the Fed to raise interest rates this week and event risk ahead of Mexico’s presidential election on July 1.


The dollar showed little reaction to growing evidence of U.S. inflation warming. Consumer prices rose at an annual rate of 2.8% in May, the highest level in 6 years, from 2.5% in April. Less volatile core inflation rose by a tick to 2.2%. The data is consistent with inflation creeping higher, a scenario that could lead the Fed to speed up the pace of rate hikes. The market had little reaction to the data as it has its sights set on the Fed’s 2 p.m. ET rate decision Wednesday. The buck’s coming performance could hinge on whether the Fed anticipates one or two more rate hikes this year.  


The yen was among the initial losers of the reassuring Trump-Kim summit as the historic meeting helped to reduce geopolitical uncertainty and thus appetite for low-yielding, safer currencies. USDJPY responded with a 0.3% rally to three-week highs, pushing the pair toward the upper end of the range that has proven key resistance. A still-uncertain backdrop for trade relations between the U.S. and multiple G-7 counterparts could help to limit bouts of weakness for the Japanese currency.


Sterling hit one-week lows overnight as it shrugged off fresh figures on the British job market. Unemployment steadied at 4.2% as expected while the 2.8% rise in annual wages stopped a bit short of expectations. The data was solid enough to keep the door cracked for the Bank of England to raise interest rates from 0.50% by year-end. Brexit uncertainty is preventing wider gains for the pound. Britain’s parliament is expected to debate how much of a say to give the government in the final agreement that the prime minister, Theresa May, reaches with her EU counterparts.

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