Market moving numbers: 4th June – 8th June 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) to take place this 2018 has most certainly rattled markets, especially with the growing anti-trade sentiments which shrouds over the United States (U.S) economy. While the U.S Federal Open Market Committee (FOMC) raised rates for the first time this year as expected, markets showed a strong 'buy on rumour, sell on fact' move as traders are seen to unwind their long U.S Dollar (USD) positions as soon as the FOMC decision took place. This behaviour has been validated several times for example during a better U.S Gross Domestic Product (GDP) release this March 2018 at 2.9% (Forecast: 2.7%) and during the March 2018 U.S Nonfarm Payrolls (NFP) release which fell below forecast at 103k (Forecast: 193k).

Over the course of these past three months however, the April 2018 U.S NFP & Consumer Price Index (CPI) release did not follow a similar pattern despite weaker numbers (Actual: 164K;Expected: 192k; Actual: 2.1%; Expected: 2.2%). The U.S Dollar Index continued to hover around 94 level as at the end of last week following a stronger May 2018 NFP release at 223k which came ahead of a forecast of 188k. Aside from supportive data, forecasters attribute an overall strength in the USD towards a more bullish FOMC statement made which indicated that levels of inflation as indicated by the Consumer Price Index (CPI) can potentially rise ahead of the targeted 2% mark this year. 

This week, the largest volatility driver as opined by the team here at EssenceFX would be from European Central Bank (ECB) Mario Draghi speech in Frankfurt. Markets are again speculating what the ECB could do to solve the problem of a surge in Italy’s debt yields that is causing stress for Italian banks and reviving questions about a euro break up. The stakes will be huge if a repeat election in the euro zone’s third-largest economy becomes a de facto referendum on Italy’s membership of the euro and its role in the European Union.

In addition to Draghi’s speaking engagement, the team here at EssenceFX view other potential drivers for strong volatility this week will be the release of US ISM Non-manufacturing services composite index and the release of Australian and Eurozone GDP scheduled to take place on Tuesday onwards. The team here at EssenceFX also notes that there will be a Reserve Bank of Australia (RBA) Cash Rate decision which is scheduled to take place on June 5. The RBA remains staunchly of the view that the current historic low of 1.5 per cent for its cash rate is the right setting and the next move, when it happens, will be up. While it was not so long ago the popular view was there would be two rate hikes this year, no one is talking that book now. The team attributes lesser importance to this event as the market has priced in a 0 per cent chance of move on Tuesday.

Other economic data release this week includes Chinese trade data which is set to loom large with U.S. negotiators in Beijing. Inflation and credit numbers are also due. In Japan, the focus is on whether a revision to first-quarter GDP shows the economy extended a growth streak or stumbled, as preliminary data indicated.

The anti-trade sentiments and geopolitical concerns still continue to remain apparent across global markets. The team here at EssenceFX will continue to track the implications of these anti-trade sentiments and geopolitical concerns and analyze the effects it stands to bring on the USD. U.S President Trump to date, has signed a memorandum imposing wide-ranging tariffs of up to U.S$60 billion on China while China's President Xi Jinping has announced tariffs to be imposed on 128 U.S goods. This led to President Trump's further announcement for a potential U.S$100 billion worth of additional tariffs to be imposed on China. Recently, China warned that all commitments so far in talks with the U.S. over trade will be withdrawn if the president carries out his threat to impose tariffs. While both the U.S. and China reported some progress in discussions at the weekend about how to reduce China’s $375 billion goods-trade surplus with the U.S., President Donald Trump’s revival last week of a plan to slap tariffs on $50 billion of Chinese imports has thrown the talks into turmoil.

In regards to global politics, following the harsh exchange of words which has formerly taken place between United States (U.S) and North Korea as reflected by the leaders of the two countries, there is now talks of a three-way summit which is scheduled to take place between South & North Korea and The U.S. The 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. This summit kicked-off following the meeting between the North Korean & South Korean Presidents on 26 April 2018. Following this, U.S President Trump is scheduled to meet North Korean President Kim Jung-un in Singapore this 12th of June 2018. This has translated into a positive for gold, on top of the various other anti-trade sentiments implemented by the U.S, causing the commodity to range around the 1,300 level.  

Over the past few months, prices of cryptocurrencies have dwindled since the crackdowns made in Korean Cypto ExchangesIn addition to this, there seems to be  a growing negative tone by global regulators.  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) elections; 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 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. 

Nonetheless for the case of the Europeans, a recent update the team of us views as pertinent to the strength of 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: "Can the U.S still hike Interest Rates this year?" Since the answer currently remains as somewhat 'more certain' (post Powell), we urge you to pick out on early trading signals to "buy on rumour sell on fact" as currency majors have been following this trend so far, moving along this 2018. 

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