- Commodity currencies vulnerable to trade wars
- Super shocks in store for Sterling today?
By Denzil Rickerby
The US Federal Open Market Committee (FOMC) rate decision overnight was largely ignored by the markets, after all the hype and market build-up. Instead, Asian equities plunged sharply after the US Trade Representative formally said in a statement that it’s considering raising the proposed tariffs on USD 200 billion in Chinese imports from 10% to 25%. In the statement, it said “the Trump Administration continues to urge China to stop its unfair practices, open its market, and engage in true market competition.” They emphasised that the US has been “very clear about the specific changes China should undertake”. But China’s response was described by the US as “regrettably” having illegally retaliated against US workers, farmers, ranchers and businesses.”
Commodity currencies vulnerable trade wars
This war of words leaves the commodity currencies vulnerable. China may not choose to retaliate to a tariff proposal, but instead could keep adding pressure to the Chinese Yuan – helping their exporters. This devaluation of the Yuan would hurt countries like Australia and New Zealand, who rely on Chinese demand.
Super shocks in store for Sterling today?
The Bank of England (BoE) “Super Thursday” is the major focus today. The central bank is expected to raise interest rates to the highest rate for nine years. That’s only the second hike in more than a decade, following the first interest rate increase in November 2017. The voting by the Monetary Policy Committee (MPC) and the new economic forecasts in the Inflation Report are the key developments to watch.
Although the pickup in UK economic growth in the second quarter has reinforced most policymakers’ view that the slowdown in the first quarter was driven by temporary factors, the overall macroeconomic environment remains vulnerable to downside risks and Brexit uncertainty lingers. The BoE could deliver a “dovish hike” this time, a cautious and “slow and steady” tone, similar to the one it adopted in November last year. Sterling – US Dollar is currently trading near a 10-month low, which tells us that the market is not looking for a hawkish outcome, although the market is pricing in a 91% chance of a rate hike. So even if a hike materialises, GBP could quickly find itself on the back foot.