Weekly Market Update 18 June – Risk aversion flooded the markets while a shift in the Fed’s stance fueled the Dollar’s rally

Weekly Market Update 18 June – Risk aversion flooded the markets while a shift in the Fed’s stance fueled the Dollar’s rally

1. Dollar strengthened against the major currencies, following the Fed’s monetary policy meeting which sang a different tune this time. In the past, the Fed repeatedly downplayed the risks of higher inflation and remained firm on its dovish stance. However, in the latest FOMC meeting, the Fed signaled that they could be tapering bond purchases amid rising inflation and progress in the labour market. They also released forecasts of two anticipated interest rate hikes by the end of 2023 and upgraded estimates for inflation for the next three years.

2. Across the Atlantic, Sterling nosedived with a slew of economic data from the UK. Retail sales, in particular, were disappointing, recording a 1.4% decline from a month earlier in May 2021. This reading fell short of a 1.6% growth estimate, following a 9.2 percent increase in April when restrictions were eased. Looking ahead, investors will be keeping a close watch on the Bank of England’s (BoE) meeting on Thursday which could cause the Pound to pare recent losses. Keeping in mind that the BoE was one of the first central banks to taper its asset purchases, and with the Fed signaling a shift away from its dovish stance, we could expect BoE to echo a similar view as well.

3. Elsewhere, EUR dipped lower against the Dollar but held its ground against the commodity currencies. Looking ahead, investors will be keeping a close watch on the flash Markit PMI data for the Eurozone, with expectations of continued growth in the bloc’s factory activities after hitting a record high in each of the previous three months. German ifo business climate data is also expected to rise to the highest since April 2019 which could limit the Euro’s downside.