Good morning

FOMC minutes were published last night and did not disappoint or excite. It would appear after the FOMC minutes that the FED have given up on a June hike. This pretty much confirms the market’s expectation but it firmed it up more. Although a small number members anticipated that the US economy would be ready for a move in June, this was seemingly outweighed by the comment that many participants thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the federal funds rate had been satisfied. The minutes did say that they “did not rule out this possibility”, but it’s hard to see the tone favouring a move in June now. As we have noted previously the hot money is betting the FOMC will in all likelihood start raising federal rates in September followed by December (0.25% on each). The big question doing the rounds this morning was whether the slowdown in growth was temporary or symptomatic of a longer-lasting loss of momentum for the economy. I would think that the data was in fact temporary and normal upbeat data will start to filter through the summer. As Pres yellen has said previously, even if the data is somewhat disappointing, there is still reason enough to raise rates and let that hike filter through the economy (2-3 months) before taking the decision to hike again. The momentum remains upbeat and the markets globally are all anticipating a rate hike so any delays will filter through the USD, Treasuries and the US stock markets. I am pretty sure Pres Yellen will avoid such action and satisfy the market by raising rates in September by 0.25%.

Following the comments by Pres Draghi of the ECB about their desire to buy bonds earlier than anticipated (bring forward QE) the EUR continued to trade around 1.1125 at the London open having rallied to a “low” of 1.1079 in Asia. I wrote a few days ago that while I think we are in a period of USD strength we are not necessarily witnessing THE RALLY that will drive through PARITY. That move will come in Q3 (in my opinion) so we still have some time before it is time to “load up” on USD’s. In the meantime you are likely to see EURUSD range trade 1.10-1.13 as FX traders alike get their ducks in a row.

GBPUSD remains above the 1.55 handle having flirted to 1.5446 yesterday. The post conservative majority victory is still giving the GBP somewhat of a lift. Today sees UK retail sales and EU PMI’s (France so far coming out better than expected, Germany due at 8.30am London). The EU referendum in the UK remains the KEY EVENT RISK and you can be rest assured when a date is announced as we head closer to the election the GBP will remain highly volatile (similar to when Scotland voted on independence). But that is unlikely to happen until at least late 2017 early 2017 so we have time. In the meantime, I think the GBP will probably remain strong vs the EUR though vs the USD it is all about when the FED raise rates. If indeed it happens in September the USD will rally vs all the major currencies and the GBP not to be left aside will weaken as a result. There is a chance we could see the GBP make one more drive above 1.58, but to be honest I am sceptical and am looking overall for the GBPUSD to decline ultimately below 1.5000 over the coming weeks/months. You can only keep the euphoria over the election going for so long and with the impending JULY budget speech I think the new austerity package will be a catalyst to drive the GBP lower finally. But fear not, vs the EUR the GBP will remain king of the castle.

Today sees the SARB (S.Africa) announce their rate decision (2pm Ldn). No change is expected and rates should remain at 5.75%. If anything I see the SARB potentially CUTTING rates (Like the RBoA have done) to stimulate the economy. However with precious metals trading better (Gold 1211, Silver 17.20) the SARB will not be rushed into making any rash decisions. Chinese Manufacturing PMI published overnight at 49.10 from 48.90. Positive yes but below expectations at 49.30…still it is a better than previous number so the men and women at the PBoC are probably having a brandy to celebrate.

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