Dollar Struggles as Geopolitics and Central Banks Take Center Stage

The US dollar is lower against major pairs this week as the market prepares for an eventful week. The U.S. Federal Reserve will kick off its June Federal Open Market Committee (FOMC) meeting on Tuesday June 12. The two day meeting is expected to end with the announcement of a 25 basis points rate hike. The same day President Donald Trump will be in Singapore for the much anticipated meting with North Korean Leader Kim Jong Un. That is also the same day that UK Prime Minister Theresa May will ask her party to overturn changes to the EU withdrawal bill. The European Central Bank (ECB) could add support for the single currency with analysts anticipating a hawkish statement signalling faster tapering on its massive QE program.

  • G7 meeting aftermath to guide markets
  • US central bank expected to hike rates on Wednesday
  • ECB and BoJ to hold but could give more insight on monetary policy

Euro Higher as Italian Drama Ebbs and ECB Forecasted Hawkish

The EUR/USD rose 0.97 percent during the last five trading sessions. The single currency is trading at 1.1761 ahead of the weekend G7 meeting in Canada. The biggest topic given the escalation of tariffs prior to the sit down will be trade. The US ended the exclusion from the steel and aluminum tariffs for the EU with a retaliation forthcoming. The trade spat has triggered a flight to safety for investors that have sold the dollar. The EUR has recovered after the Italian political crisis was averted although questions remain on the stability of the Union as the rise of euro scepticism grows.

The ECB is now expected to tighten monetary policy in June following the actions from the U.S. Federal Reserve. The rate lift by the US central bank has already been priced in which is why it won’t drive the USD higher. The ECB in contrast has been less clear with its monetary policy intentions. EUR/USD flows indicate a belief that with the Fed tightening on Wednesday it can offer a further monetary policy signal and make a clear indication it will end its QE program this year opening the possibility of an European rate hike in 2019.

The Fed and the ECB could collectively make a statement on their confidence on the strength of their respective economies. While the central banks might be on the same page things are different on the political arena. US President Donald Trump was again on the trade offensive ahead of the G7 meetings. The US risks being isolated from other major economies if the tone continues to be so combative. The US has opened various fronts which will tax its ability to deal effectively with so many concurrent negotiations on top of growing issues of national importance.

Loonie Lower as Canada Hosts G7 Meeting

The USD/CAD gained 0.24 percent during the week. The currency pair is trading at 1.2983 after trading in a tight band all week. The US has toughened its stance on trade adding uncertainty to NAFTA ongoing renegotiations. The loonie also took a hit from the weaker than expected job numbers published on Friday. The Canadian economy lost 7,500 jobs in May with a forecast of a gain of 17,500. The main positive of the report was the rise of hourly wages and it might just have been enough to cancel the negative impact of the headline number miss.

Canadian dollar weekly graph June 4, 2018

Possible End of OPEC and Russia Deal to Decide Fate of Crude Prices

Oil prices will end the week close to where they started it. West Texas Intermediate is trading at $65.57 very close to the $65.74 price level at market open on Monday. Supply worries from Venezuela and Iran have kept prices near current levels even as the Organization of the Petroleum Exporting Countries (OPEC) and Russia will meet to review the state of their crude output agreement. The deal to limit the amount of supply has been the biggest factor in keeping prices stable after the free fall of 2014. The talk surrounding a possible easing of those terms to allow members to capitalize on high prices have put downward pressure on prices. The OPEC and Russia will meet on June 22.

Pound Rises Despite Brexit Concerns

The GBP/USD gained 0.30 percent in the last five days. The currency pair is trading at 1.3382 ahead of an important decision on the Brexit process on Tuesday. The UK government will be taking votes on its EU withdrawal bill, which could end up with Parliament having a say in the Brexit deal minimizing the possibility of a hard exit scenario. The optimism about a softer Brexit deal and the possibility of a rate hike later in the summer by the Bank of England (BoE) have boosted the GBP.

Market events to watch this week:

Monday, June 11
4:30am GBP Manufacturing Production m/m
Tuesday, June 12
4:30am GBP Average Earnings Index 3m/y
8:30am USD CPI m/m
8:30am USD Core CPI m/m
10:00pm AUD RBA Gov Lowe Speaks
Wednesday, June 13
4:30am GBP CPI y/y
8:30am USD PPI m/m
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Economic Projections
2:00pm USD FOMC Statement
2:00pm USD Federal Funds Rate
2:30pm USD FOMC Press Conference
9:30pm AUD Employment Change
Thursday, June 14
4:30am GBP Retail Sales m/m
7:45am EUR Main Refinancing Rate
8:30am EUR ECB Press Conference
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m
Midnight JPY BOJ Policy Rate
Midnight JPY Monetary Policy Statement
Friday, June 15
Tentative JPY
BOJ Press Conference

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza