Wall Street Ends Lower on More Hawkish Fed

Whilst the Fed’s second rate rise this year was broadly expected, the central bank’s increasingly hawkish tone came as a bit more of a surprise, sending US equities and treasuries lower, whilst also causing a brief spike higher in the dollar.  The US economic outlook has improved with the Fed expecting a continued fall in unemployment to 3.5% and a rise in inflation (PCE) to 2%. The upbeat outlook from the Fed, along with the bank’s more aggressive stance, of 4 hikes rather than 3 previously expected across the year, raised concerns over higher borrowing costs, which dragged the markets lower. These same concerns, coupled with further trade war talk from the White House saw a mixed performance from Asia, whilst Europe is also set for a softer start.

Euro Climbs Ahead of ECB Taper Talk

After ECB Chief economist and known dove Peter Praet confirmed that the ECB will be discussing the winding down of QE at this month’s meeting, euro investors cheered. The euro has recovered from the Italian political turmoil earlier this month which saw it sink to $1.1511 and with some further encouragement from the ECB, $1.20 could be back in sight. Whilst no definitive timetable is expected until July, market expectations are fairly broad leaving little room for disappointment. As long as the program comes to a close by the end of the year euro traders should remain bullish. However, with trade war fears escalating, Italian political risk still present and a slowdown of momentum in the eurozone economy, the ECB’s position is notably weaker than it was at the start of the year.  Still the fact that Praet made these comments suggests that the doves on the ECB are happy to move forward and the euro has been climbing steadily on the same assumption.

UK Retail Sales to Lift Sterling towards $1.35?

After yet another disappointing week for U.K. economic data, traders will be eyeing today’s retail sales with some caution. Expectations are for a jump in sales of 2.5% year on year in May, up from 1.5% in April. May saw some particularly warm weather hit the isles, which could have easily lured shoppers to the high street, furthermore wage growth has been outpacing inflation for three months now, so consumers should slowly be starting to feel a little less pressure on their purses; a surprise to the upside could be on the cards. A strong print could go some way to lifting the probability for a rate hike in August, which after this week’s data so far looks limited at best.

After a week of disappointing data which has raised serious doubts over the BoE’s ability to hike this summer, combined with a more hawkish Fed, has seen the pound continue to languish in a tight range. A dose of optimism today could see the pound target $1.35 for the first time in 3 weeks as the hike is returned to the table.