Federal Reserve June Meeting Shapes USD Sentiment
The USD rose alongside the Federal Reserve’s hawkish rhetoric in May, but at the time of writing, there’s a sense that the currency has decelerated into a circling pattern ahead of the central bank’s interest rate decision set for 14-15 June.
The Fed is widely expected to raise its key interest rate guidance by 0.5 percent in June and July and then pause on rate hikes in September. In another scenario, a hike of 0.75 percent is on the table and there are reports that Federal Reserve Vice Chairman Lael Brainard doesn’t support the September pause.
The outlook for the US economy is complicated by the impact of USD strength on US exports after tech giant Microsoft cut its revenue and earnings estimates for the fiscal quarter ending this month, citing unfavourable foreign exchange conditions.
The headwinds for the tech sector are tailwinds for the banking sector. As interest rates rise in the US, banks like Wells Fargo and Bank of America can expect higher interest rate income and asset growth as deposits into savings accounts and purchases of bank bonds increase. Not to paint too rosy a picture, there’s also the possibility of unfavourable foreign exchange rate effects on the banking sector amid volatility in the currency markets.
Geopolitical events
Geopolitical events in Ukraine are expected to continue to pressure commodity prices and supply chains, especially in the energy sector. Crude oil spot prices and natural gas prices are likely to stay elevated under these conditions, and questions around China’s growth also affect the energy sector.
China’s factory output declined in May because of COVID-19 lockdowns. Even though restrictions eased at the end of the month, they reappeared because of China’s zero-tolerance COVID policy and this pattern might continue through June.
The energy markets are sensitive to China’s growth reports. When the world’s second-largest economy weakens, global demand for crude oil declines along with it, meaning a parallel downwards drift in crude oil spot prices. But given the ongoing geopolitical challenges, it would take a significant decline in China’s GDP growth to deflate crude oil spot prices.
Gold spot prices
The strong USD stalemated gold spot prices through May, backed by rising interest rates and robust job growth, but there are signs that employment levels are softening. This could mean resistance for the USD and support for gold if the US job market starts to erode.
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