THE WEEK AHEAD 

Market moving numbers: 2nd July – 6th July 2018:

New Federal Reserve Chairman, Jerome Powell's statement which indicated that there might be a possibility of as many as four Interest Rate hikes out of the Federal Open Market Committee (FOMC) this 2018 has most certainly rattled markets, especially with the growing anti-trade sentiments which continues to shroud over the United States (U.S) economy. Nonetheless, over the course of these past three months, even negative U.S related economic data did not deter the U.S Dollar (USD) from sustaining a steady uptrend. Forecasters have been attributing this occurrence towards the more bullish FOMC statements made which indicate that levels of inflation as shown by the Consumer Price Index (CPI) can potentially keep hovering ahead of the targeted 2% mark this year. The U.S Dollar Index (DX) increased to the 94 level last week and seems to be well on track to head towards the 95 level. While it reached the 95 level in the middle of the week, the DX fell to mid-94s on Friday following the less favourable United States (U.S) Annualized First Quarter (Q1) Gross Domestic Product (GDP) data release from the U.S which inched down slightly from 2.2% to 2.0%.  

Three weeks ago, the FOMC raised the benchmark Interest rates from to 1.75% from 2.0%. While this move was largely anticipated, the team here at EssenceFX notes on the sustenance in the USD's strength as reflected by the DX which goes against the typical 'sell on fact' move usually seen. This strongly indicates that markets maintain a generally hawkish sentiment post the U.S FOMC and are pricing in for four Interest Rate hikes this year. 

Politically, while the Trump and Kim meeting which took place in Singapore seemed to have fared well, the U.S are still in a pretty rattled relationship with China and Canada. Formerly, President Trump quoted that Canadian Prime Minister Justin Trudeau to be a dishonest and weak individual and claimed that the Canadian Prime Minister made "false statements" in regards to US endorsing a G-7 communique. In regards to China, the American President signed a memorandum imposing wide-ranging tariffs of up to U.S$60 billion on China. This month alone, a list of 818 Chinese goods amounting U.S$50 billion was confirmed to be hit by a 25% tariff, with the Trump administration pledging more (as much as U.S$100 billion) duties if China retaliated. This follows previously imposed tariffs on steel and aluminum imports. On China's end, they have formerly introduced their own tariffs on imports of 128 U.S products. There is now fresh speculation for U.S President Trump to revive the Trans-Pacific Partnership (TPP) to enact further pressure on China. The Mexico presidential elections on Sunday will also mark a new stage for the country's relations with the U.S.

In addition for the month, U.S President Trump also took a hit at the European Union (EU) and stated that the U.S might be placing a 20% tariff on all cars coming into the U.S. This follows the EU’s decision to slap tariffs on $3B worth of US goods in an effort to exert political pressure on the President.

China kicked things off this week when the official manufacturing and non-manufacturing Purchasing Managers’ Indices (PMIs) were released on Saturday. Manufacturing PMI in China released on Saturday fell to 51.5 in June, from 51.9 in the prior month and slightly less than the market consensus of 51.6. The IHS Markit U.S. Manufacturing PMI also fell to 54.6 from 56.4 in May, well below market expectations of 56.5. However, the IHS Markit/CIPS U.K. Manufacturing PMI stood at 54.4 in June 2018, little-changed from 54.3 in May, and above market expectations of 54.0.  The outcome of these indicators sets the tone for the rest of the week, in which the stronger than forecast reading is generally bullish for the Great Britain Pound (GBP), while the lower than expected reading for the U.S. Manufacturing PMI and China PMI should be taken as bearish for the USD and Chinese Yuan respectively.

On Friday, the U.S. Labour Department will release its non-farm payrolls for June and it will be watched more for the average hourly earnings figures, which are expected to rise 0.3%, than hiring. There is also the release of the minutes from the Federal Reserve’s last meeting on Thursday where we will be looking for reaffirmation of Powell’s recent statement that the case of continued gradual interest rate hikes remains strong. However, if the minutes suggest otherwise then there is a risk for some dollar profit-taking ahead of Friday’s jobs report. Canada’s employment data is also published at the same time as the U.S. non-farm payrolls report. On Tuesday, the Reserve Bank of Australia (RBA) will publish its latest interest rate decision along with the policy statement. Like the Reserve Bank of New Zealand (RBNZ) last week, the RBA is expected to keep rates unchanged at 1.50% and should there be a neutral to dovish tone in the accompanying statement like in the case of the RBNZ, then the AUD could weaken.

In regards to global politics, South Korean President, Moon Jae-in noted that nuclear disarmament is not something that can be realised through an agreement merely between South and North Korea alone. President Moon views it to be an agreement which requires a U.S guarantee that normalisation of some economic rationalization between the U.S and North Korea will take place following any disarmament (any update?). This summit kicked-off following the meeting between the North Korean & South Korean Presidents on 26 April 2018. U.S President Trump has successfully met up with North Korean President Kim Jung-un in Singapore on the 12th of June 2018. This has translated into a negative for gold, causing the commodity to fall even further this week to the 1,240 level.

Over the past few months, prices of cryptocurrencies have dwindled since South Korea's clampdown of bitcoin and amidst deteriorating market interest as indicated by falling market capitalization by major the cryptocurrencies (do add in if there is any other major updates).  In a related perspective, several recent developments have also caused us to reassess our longer term take on gold for one; the announcement of blockchain moving into the financial mainstream with IBM's dealings with certain European banks and the continued hype in cryptocurrency with more mainstream players jumping in especially post heavier support from colossal entities such as the International Monetary Fund (IMF)In some instances, it does lead us to question whether the IMF 'intentionally' offloaded so much of their holdings of gold onto China. Nonetheless, the team will continue to closely monitor the developments of competing Gen Z favouring currency alternatives vis-a-vis the typical age long established Gen X favoured safe haven to provide you with a better overview. One strong view the team has moving along this 2018 is that falls in cryptocurrencies has somewhat led to the increase in gold prices, indicating to us a growing tendency of crypto holders to cash out their holdings in crypto and switch to the age old safe haven (gold) for protection of value.  

In relation to our highlighted 'populist movement' and the psychological effects it continues to bring upon our modern day society, the team here at EssenceFX would like to reiterate based on what happened in the recent United Kingdom (U.K) general elections (GE); there are a large mass of U.K citizens which demand for a change of leadership in the country. With U.K as a precedent, it intrigues us to also reflect on the surprises the recently announced German General Elections has brought about, with the far right Alternative for Deutschland (AfD) party gaining strong momentum; resulting to their entry into parliament. In regards to recent 2018 Italian Elections, we witnessed more unexpected scenario's just as formerly opined by the team here at EssenceFX with the anti-EU Five-Star Movement which shocked markets by taking more than 30% of the tallyThe more 'populist' or 'Eurosceptic' parties in our opinion has potential to place renewed and substantial pressure on the Euro (EUR) as they move to table their respective policies. The team here at EssenceFX will track this potential pressures in the EUR in the weeks to come. Mexico saw Andres Manuel Lopez Obrador winning its presidential election on Sunday, hence setting the stage for a government that will inherit the North American Free Trade Agreement negotiations and tense relations with U.S. Manuel Lopez is an outspoken critic of Donald Trump and could move Mexico to a nationalistic and social direction as he promised to reduce economic dependence on the U.S. Should there be more headlines about the intentions of the new president, volatility might arise on MXN. Following the Mexican GE, for this 2018 we will see Columbia's GE on June 17th, Turkey's GE on June 24th, Brazil's GE on October 7th, and U.S GE on November 6th.

Nonetheless for the case of the Europeans, a recent update the team of us view which adds pertinent to the strength to the Euro is that the French Finance Minister Bruno Le Maire stated that he wanted to create a single economic zone to “rival China and the US” as many countries on the continent emerge economically. In our view, the “deepening of economic and monetary union” objective is a difficult one to achieve as there is much public opposition to the idea of a superstate. Nonetheless, deepening global competitiveness as well as positive numbers out of Europe as of late could ignite some fresh considerations in regards to the matter.  

In conclusion of this week's write-up, we would like to once again bring your focus back to the bigger picture as we close off with this question: "Will the U.S still hike Interest Rates this year?" Since the answer currently remains as somewhat 'more certain' (post Fed Powell's statement), we urge you to pick out on early trading signals to "buy on rumour and sell on fact" as currency majors have been following this trend so far, moving along 2018. 

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