Weekly Market Outlook

Weekly Market Recap: USD, GBP and Euro lower on Central Banks Cautious Approach

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USD: Powell Plays down Inflation Pressures 

In a hearing before a U.S. House of Representatives panel on Tuesday, Federal Reserve Chair Jerome Powell reaffirmed that the Fed will not raise interest rates too quickly based only on the fear of increasing inflationary pressures. Powell said it’s highly unlikely that inflation will rise to levels seen in the 1970s, but acknowledged significant uncertainty as the economy reopens. He confirmed that the Fed seeks broad and inclusive recovery of the job market first. The Federal Reserve expects the end of the pandemic to temporarily push up inflation this year. 

Last week, Fed’s officials increase their median forecast for inflation this year. consumer prices in the fourth quarter of 2021 are seen at 3.4% from a year before. That is up from their 2.4% forecast in March. This came after high inflation readings that showed the 12-month prices rose by 5% in May, the highest level since 2008.

USD index is trading slightly lower for the week, near its two-month highs as traders still expect that the Fed may aggressively tighten monetary policy if high inflation persists. DXY bottomed around the 91.70 level, near the support area around 91.50. Sluggish economic data, including weekly jobless claims numbers and disappointing durable goods orders, also kept the negative sentiment.


GBP: BoE won’t rush into Policy Tightening 

The pound tumbled after the BoE policy meeting. The Bank of England voted unanimously to keep its benchmark interest rate on hold at a record low of 0.1 % in its June meeting, and by a majority of 8-1 to leave its bond-buying programme unchanged as widely expected. The central bank also stated that it does not intend to tighten monetary policy until there is clear evidence that the economy is recovering and inflation holds around 2% sustainably. 

The bank’s policymakers are expecting strong GDP growth following the relaxation of restrictions on economic activity, after which it will fall back. CPI inflation is expected to pick up further above the target, due to recent changes in energy and other commodity prices, and is likely to exceed 3% for a temporary period, before returning to 2% in the medium term.

Euro: ECB’s Lagarde projects weak Inflationary Pressures 

European Central Bank President Christine Lagarde said on Monday that accelerating U.S. inflation that prompted the Federal Reserve to shift its view of price risks will have only a limited impact in the euro area. Lagarde rejected comparisons between both economies, saying the recovery in the US is farther ahead compared to the eurozone.

Lagarde stated that outlook for the economy is indeed brightening as the pandemic situation improves, however, underlying price pressures are likely to remain subdued despite an expected increase somewhat this year owing to temporary supply constraints and the recovery in domestic demand.

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