19th June - Dollar Strength Continues
- Jun 19
- 5 min read
In terms of geopolitics, compared to previous days in the past few months, yesterday was a relatively quiet day. There was some general chatter surrounding the terms of the US/Iran peace deal, but nothing significant that altered the terms already agreed upon. The remaining stumbling block is Israel's actions in Lebanon, whether Israel will agree to cease hostilities there to fully put an end to this period of conflict.
Most major leaders have now left France after the G7 summit and will return to their countries, so we may see some more developments on local fronts over the coming days.
Outside of politics, one significant point to make has been the continued fall in oil prices, with Brent Crude now trading around $80, which is a full 35% drop from the $120 highs at the start of May. A continuation downwards for oil will have a significant impact on all countries' inflation figures and, consequently, on interest rate decisions. The next key marker will be to see whether inflation stays elevated despite a fall in oil, or whether the global inflation shock will dissipate as soon as oil returns close to its pre-war levels.
Forex
By far the biggest mover on the day was the USD, which continued its post-FOMC strength throughout the day. The DXY rose again and touched the 101.000 level, before falling back a little at the time of writing. We should expect to see further strength over the coming days as markets continue to digest the hawkish FOMC meeting.
We saw another possible intervention in USD/JPY recently, owing again to the USD strength on the day pushing the pair upwards. Very interestingly, the USD/JPY market made a significant move yesterday and blew through the level at which the BoJ intervened in April. However, once it reached the level at which the BoJ intervened on July 2024, we saw a sudden and violent move down in the pair. The more interesting aspect of this, however, is that the move was sudden but not extreme; the market has since stabilized and even looks to be continuing back up to that previous intervention level. This begs the question, was this actual interference or the market making the assumption there would be interference and doing the BoJ's job for them? If the market continues back up to this key level, the reaction will be fascinating.
Outside of the USD, we saw interest rate decisions from both the BoE and SNB yesterday, with both holding as expected. The BoE released their vote split, with 2 of the nine members voting for a hike and 7 voting to hold. The expectation was for just one hike vote, meaning this was a mildly hawkish news event. The GBP did catch a little support, but the one vote difference was not enough to move the markets significantly. Something that has the potential to move the markets far more is the result from the Makerfield by-election, where the former Greater Manchester Mayor won the race to become the area's new MP. This would not normally be big news, but Andy Burnham is a leading contender to take over from Keir Starmer should there be a leadership challenge in the Labour Party. Any further news about a challenge being put forward will cause significant uncertainty around the UK economy in the short term and so should negatively impact the GBP. The situation is one to watch for those who trade in the GBP.
The SNB kept rates at 0% as expected, with no real unexpected guidance to go with it. The CHF will then continue to move based on its underlying fundamentals, where at present it is under pressure thanks to the removal of any safe-haven demand it may have found during the Iran war.
The CAD is continuing its trend of falling along with oil, which is likely to continue for a little while longer whilst the whole world focuses on energy prices. The EUR was largely stable on the day with no significant news to affect it directly, whilst the AUD and NZD were also relatively stable despite seeing further falls in precious metals prices.
Indices
Yesterday was another day where capital seemed to switch from value back to growth. Markets seem to be jumping between the two on almost a daily basis at present. The Dow was relatively level on the day, whilst the Nasdaq rose by 2% and the SPX500 by 0.8%. Interestingly, the Russell 2000 was a winner on the day (up 1.75%), implying some of the move may have been driven by small-cap stocks as opposed to the larger mega-cap companies that have been dominating the market. This may have been driven by a small amount of treasury yield relief, but on a one-day sample, it is difficult to say if this is just noise or a concrete link.
The interest moving forward remains the contradiction between the dot plot prediction and reducing oil prices. The key factor is how baked in the higher prices are and how long inflation will be a problem. If the recent higher inflation has already made its way into the economy, it will take a long time to work its way through the economy, no matter how quickly oil prices fall. If it has not baked in, lower oil will quickly bring down inflation and so remove the need for any rate hikes. This all makes the next inflation prints absolutely crucial for the interest rate picture for the rest of the year.
Precious Metals
Both Gold and Silver are continuing their slide down, pressured by a stronger dollar and interest rate hikes around the corner. The situation has not changed for metals: short-term weakness, then possible long-term strength. The key for metals now is the dot plot versus oil prices tension, as mentioned. A quick reduction in inflation will remove the need for rate hikes that precious metals will love; sticky inflation will mean higher rates for longer, and metals could be under pressure for longer than expected. Next month's CPI prints will be crucial.
Today's market Drivers
US Bank Holiday - Today is Juneteenth and so a bank holiday in the US, so we would not expect to see too much movement in the markets going into the weekend.
BoJ Intervention Watch - They have already intervened once and may have already intervened twice. If we make it back to the July 24 intervention levels, this will be one to watch.
Iran - This is now far less of a catalyst, but nonetheless, any unexpected news or developments in the region could cause moves in the market.
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