1. The dollar index retreated from a 2-month high in June, opening at 104.5 on the first day of the month before falling below 102. Towards the end of the month, the dollar pared losses to close at 103. The events of June were overshadowed by the Fed pausing rate hikes for the first time in 15 months, after 10 consecutive hikes brought rates to the current high of 5.25%. Despite this pause, Fed Chair Powell drove home his point about the improbability of rate cuts “happening any time soon”, while remaining non-committal about July’s rate decision. Fed officials had originally adopted the term “skip” instead of “pause” to disabuse markets of the notion that a pivot would soon follow any pause, but Powell quickly abandoned the term “skip” due to its implication that a July hike was already set in stone. Many market watchers have tried to explain the apparent incongruence between pausing now while pencilling in two further 25bps rate hikes. Some have chalked it down to poor signalling that backed the Fed into the rate-pause corner, while others believe it was a compromise between the hawks and doves, with few buying Powell’s explanation that monetary lags are long and one month gives the Fed more time to observe the economy’s health as they approach the end of their tightening cycle. As the Fed remains data-dependent, the robust GDP growth and rebound in consumer confidence has strengthened the possibility of a rate hike in July, giving strength to the dollar.
2. The euro revisited a month-high of $1.10 against the dollar, as the ECB continued its rate hike campaign. Initially, markets had been expecting the ECB to waver in its resolve to continue hiking rates, especially after the Fed stopped hiking. The euro area also fell into a technical recession after contracting for two straight quarters since Q4 2022. However, markets quickly recalibrated after ECB President Lagarde voiced her doubts about inflation having been stamped out. The ECB continued raising rates by 25bps in June, with Lagarde signalling that another hike in July remained “very likely”. Her colleague de Guindos agreed by calling the July hike a “fait accompli”. With inflation cooling in Italy, Belgium, the Netherlands, Spain, and France, the rate decision for September remains near-impossible to predict.
3. The pound sterling rose against the dollar to a year-high of $1.28 before renewed pessimism about the UK economy led the pound lower to $1.27. The BOE remains by far the most hawkish among major central banks, necessitated by the UK’s rampant, persistently high inflation. The labour market continued to show resilience, as unemployment claims fell unexpectedly while wages rose. More worryingly, CPI y/y came in higher than expected, which could have caused the BOE to resort to a jumbo 50bps hike in June, bringing the official bank rate to 5.00%—not seen since 2008. However, the pound weakened after fears of a recession grew. BOE Governor Bailey recognised the impact of higher interest rates on households that were servicing mortgages or loans, but maintained that the decision was taken to avert a more severe situation later on, which many took to be runaway inflation.
4. The commodity currencies strengthened against the dollar last month, but the gains were uneven, as the aussie and kiwi pared more gains than the loonie. The USD/CAD ended the month at $1.32, but not before testing $1.31 at its strongest. The BOC surprised markets by resuming its rate hike cycle after having paused since January. The BOC was likely pushed into retightening after continued immigration kept prices up while giving more steam to the economy. However, even as retail sales posted above estimates, inflation continued falling and the economy stalled in April, leading to increased uncertainty about the future direction of rates. The RBA also rolled out a surprise hike, causing the aussie dollar to rise to $0.69 before falling to $0.66. The Australian economy returned mixed results in June, as GDP growth came in below expectations but employment rose to a record level and the unemployment rate fell. The RBA’s policy minutes also showed a commitment to data-dependence moving forward, causing the aussie to weaken as markets trimmed bets on the RBA’s continued tightening. The kiwi rose to $0.62 against the dollar before falling to $0.61, as the New Zealand economy went into a recession after contracting for two straight quarters. The trade deficit also shrank as tourists returned to the island country, keeping the kiwi supported in the near-term.
5. Brent crude remained range-bound in June, hovering between $71 and $78 per barrel as demand forecasts have fluctuated. Despite the production cuts by OPEC+’s de facto leader Saudi Arabia, supply has continued flowing from Russia and Iran, keeping a lid on prices. Worries of continued tightening by major central banks have also dampened demand for the commodity, marking the fourth-straight monthly decline in 4 years. Gold continued its bearish slide, falling below $1900 per ounce before recovering to end the month near $1920. As US equities have rallied in June, gold has fallen out of favour with traders. Some segments of the market are warming to the idea that the much-heralded recession will not materialise after all, leading to increased risk-on sentiment and traders exiting safe haven assets including gold.
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