FX

USD Caught Between Weaker Data and a Resolute Fed

_{Posted on Jun 15, 2017}

The Federal Reserve (Fed) delivered the widely expected 25 basis points rate hike and dismissed the persistently weak inflation readings in the US.

US' core inflation reading +0.1% and retail sales -0.3% for May came in below the market's and Citi's expectations.

The Federal Reserve (Fed) lifted the cash rate by 25 basis points to 1.00 – 1.25% and dismissed the recent weak inflation readings as a result of one-off factors. Citi analysts now expect the Fed's balance sheet reduction to be announced in September with the next rate hike likely to take place in December.

Strategy: USD still range bound.

The Dollar Index (DXY) stopped short of the 96.50 region last night which potentially marks the base of a rising trend. However, without further progress on Trump's economic agenda, it is likely to be difficult for the DXY to cross either side of the 96.20 – 98.50 range.

UK's unemployment rate reached a 42-year low at 4.6% and average weekly earnings grew less than expected.

Strategy: GBP remains a sell on rallies.

GBP fell to a 1.2723 low overnight on mixed jobs data and news of yet further delays to the Conservatives/ DUP deal. Brexit talks, originally scheduled for the 19th, are also likely to be postponed. Citi analysts expect political disarray to water down UK's fiscal tightening plans and to result in a review of the Brexit strategy. The possibility of a new Prime Minister and fresh elections in the next 12 months cannot be ruled out. Risks to the sterling are skewed to the downside, potentially targeting 1.29 – 1.30 for the GBPUSD and 0.8700- 50 for the EURGBP.

Strategy: CAD continues to outperform

The USDCAD continues to hover around this week’s lows and Citi analysts see support around 1.3212-24 breaking. That said, given the Fed’s more resolute tone, a bullish CAD view remains better expressed via AUD, JPY and GBP crosses. In particular, the GBPCAD cross is potentially targeting the 1.6150-1.62 area as the Bank of Canada may shift to a tightening bias in its upcoming meeting on July 12th.

Weak consumer confidence figures released yesterday in Australia suggest that consumption is likely to remain subdued in the near term. This is likely to cap the AUD. Meanwhile, New Zealand's weaker than expected first quarter GDP growth is likely to stall the NZD's recent uptrend.

This is an extract from the Daily Currency Update, dated 15th June. Please approach a Citigold Relationship Manager if you would like a copy.