Midweek Drivers: The FED to Take Center Stage as Geopolitical Risk Lingers

We take a look at the key mid-week themes with Dukascopy TV, as we enter the 2nd half of the week.

We are in the middle of a quiet week, during which the markets appear to be recovering.

In the meantime, there is news that there are various upcoming geopolitical events that could impact the markets. Could you comment on them?

There’s civil and social unrest in the U.S, which could see a material escalation as news hits the wires of people driving into crowds of protestors.

This would be quite a disaster for the U.S and beyond. Racism has been a key issue globally for some time. That’s coming to a head.

Then there is the U.S – China tension and the whole COVID-19 issue that is simmering. This could boil over at any time.

Finally, there is Brexit. The chances of a hard Brexit continues to rise as we approach the end of June deadline for a Brexit blueprint.

These are the key geopolitical risks that we need to keep an eye on near-term.

Namely, Brexit, US-China and US domestic issues are to be watched.

However, what about economic data releases? Should we stop watching the economic calendars?

It would be a dangerous move to completely ignore economic data and the economic calendar.

There are a number of stats that we will need to keep an eye. In terms of labor markets, initial jobless claims on Thursday will garner plenty of interest following last week’s nonfarm payrolls.

On Friday, there are also consumer sentiment figures due out of the U.S on Friday. From New Zealand, consumer sentiment figures are also due out on Thursday.

We will need consumer confidence to really pick up to support a recovery in service sector activity and consumption.

From the UK, we’ve got GDP numbers and they are going to be particularly dire. We could see the stats spook the pound, especially with the rising chance of a hard Brexit…

Fiscal policy is already in full stimulus mode. Meanwhile, monetary policy does the same with asset purchases and talk of negative interest rates.

Seems as though the markets are clamoring for negative rates as well. It had been Trump’s hot topic in recent months as he attempted to force the FED to deliver zero and then negative rates.

We even heard the BoE begin discussing negative rates.  We’re unlikely to see the FED chop rates into negative territory, however, and Trump will be disappointed with that.

We will get a sense of what lies ahead in the FOMC economic projections and interest rate projections on Wednesday.

The projections will certainly be interesting when considering this will be the 1^st time this year that the markets can see through the FED’s lens…

So, while there has been plenty of chatter, it’s a big step for the likes of the FED and the BoE to make such a move.

It appears that the Bank of England will be reacting to the government’s decisions.

What about other central banks?

In terms of other central banks, I think that we are getting to the point where they may take their cues from the FED.

We’ve got the EUR at $1.13 levels, the Pound at $1.27 levels and then there are the commodity currencies.

The upside has come amidst quite a dire economic environment. So, are we going to see a currency war as we have seen in the past, where central banks are forced into currency manipulation? Well, we call it monetary policy easing…

Central banks may be forced to ease monetary policy further to support exports particularly for the likes of the Eurozone.

It will be interesting when considering where we are from a monetary policy perspective. There’s not much left in the tank for central banks to stem currency appreciation, let alone reverse it.

For now, however, expect central banks to take their cues from the FED.