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The interest rate guessing game

​​​​​​Today's news headlines:

  • ‘Johnson momentum kicks off battle for second place’. Boris Johnson’s strong showing, while rather unexpected, suggests he will be the ultimate victor in the race to be Prime Minister. Second place candidates, Gove and Hunt, are hustling to find a way to build traction. (Financial Times)
  • ‘Tanker attacks/US says video shows Iranian military removing mine’. Michael Pompeo, the head of the US intelligence apparatus, showed a video to public outlets blaming the Strait of Hormuz oil tanker attacks on Iranian military. (The Guardian)

Spotlight on central banks

Today’s US Retail Sales is the last key data release before the Federal Reserve meeting next week and could increase the odds of a dovish shock if the reading disappoints. The retail sales outlook has been mixed, but last week’s disappointing labour data could contribute to a poor figure. As markets continue to price in 25bps of cuts for the July meeting, it should come as no surprise if the Fed decides to act earlier. The Fed may also implement an ‘insurance cut’ to calm fears over intensifying trade conflicts and recession signals from the bond market. Shifting to the UK, Bank of England (BoE) Governor Mark Carney speaks today ahead of the Monetary Policy Committee (MPC) interest rate decision next week. Clearly, the UK’s employment data has been strong, but confidence and production figures have taken a hit. Nevertheless, the BoE’s Andy Haldane commented that a small rate rise could soon be necessary to combat inflationary pressures.

Bottom line: Although neither central bank is expected to hike/cut next week, the tone set by policymakers will be key in anticipating their next move. We may see dissent in the voting as individual members turn more hawkish/dovish than their colleagues.

No cause for concern

In recent months, global growth concerns and trade tensions between the world's two largest economies, the US and China, has resulted in risk aversion. Last week the tension dissipated somewhat with a reconciliation between the US and Mexico over immigration tensions, but the US administration seems poised, ready to strike at the near provocation. Overnight, two oil tankers in the Gulf of Oman were attacked by Iran—a headline that historically would have triggered fears of an oil supply squeeze and driven prices skywards. Current pessimism over global growth translates into lower demand for energy and naturally keeps oil prices lower and offsets supply shock concerns. Brent futures have fallen almost 14% in the past month and have only moved marginally higher on the recent headline. Investors continue to seek safe-haven assets with demand for US Treasuries at high and gold—the world's original store of value—is trading at the top of a five-year trading range. While supply concerns cannot be discounted, the main takeaway from this latest episode is the rising geopolitical risk and the potential knock-on effects to the global economy.

Bottom line: Along with the Nord Stream 2 hostilities (read yesterday's commentary) this is the second energy-related tension driven by the US.  Our view is that anticipation of the monetary policy easing in developed markets is driving asset valuations, and these types of stories only reinforce the markets perception of risk and the need for policy intervention.


The trade-weighted Dollar remains supported at the 200-day moving average while Sterling continues to trade sideways. There appears to be very little happening here until a larger catalyst can dislodge the Dollar.


After rebounding from the trade-weighted 200-day moving average, the common currency has experienced two consecutive days of pullback. Despite little momentum in the EUR at the moment, it’s likely to remain the key driver for this pair until the UK election outcome is known, or even longer.


After rebounding from the 200-day moving average, the pair seems supported at the 100-day moving average. This is a reflection of the Dollar’s movements, more than Euro. The rising Iranian tensions may contribute to a deterioration in risk sentiment.