Disputes over trade tariffs and increasingly active central banks are increasing the volatility on financial markets and key moves are being seen again across forex, equities and commodities. After the ECB and the Federal Reserve impacted last week, attention turns to the Bank of England this week. We consider the outlook for markets.
Central banks came back to the fore last week to remind us that for all the geopolitical risk factors (Trump’s various trade disputes, Italian politics, Iranian nuclear sanctions and of course North Korea), monetary policy remain crucial for markets. The G3 central banks (the Fed, ECB and BoJ) all announced last week and signaled something of note. The Federal Reserve seemed to try its hardest to sound hawkish in its rate hike, but the market remains decidedly uncertain. Maybe it was the shifting of just one dot on the plots that although officially signals four hikes this year, but leaves such a move still massively in the balance. However, the yield curve continues to flatten with the 10 year Treasury yield struggling for traction, and this is not great for expectations of future growth and could begin to weigh on the dollar. With the US trade disputes ramping up and twin deficit still a drag on the economy, the outlook is not especially bullish for the medium to longer term. Near term relative dollar performance has been helped by the ECB’s dovish taper which has pulled the euro 200 pips lower. However, although the ECB strengthened forward guidance adding emphasis to inflation data, the Eurozone recovery is still developing and once the dust settles, the market should remain medium/long term euro supportive. The Bank of Japan cut its inflation outlook to retain a dovish stance on monetary policy which means yen underperformance however as we see again today geopolitical flare ups are still a caveat to this creating opportunities.
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