There had seemed to be the start of a strong and highly Dollar-destructive development in markets afoot in the past week or so. Because the Fed had been so late to adjust monetary policy to evidence of rising inflation, we had ended up in an episode where almost every day expectations for monetary tightening in the US had been getting stronger. Day by day the expected reward for holding USD exposure was therefore growing and it was dragging the spot and forward value of the Dollar up with it. This persistent upward revision in expectations alongside relatively daunting risk conditions in markets globally is what had delivered this record-breaking Dollar strength.
This rapid rise had to end somewhere and whilst the Fed was far from done hiking, the constant upgrading of expectations of what the Reserve would do to stem inflation seemed to be over. Following the last Fed decision, markets seemed to call time on the peak acceleration of Fed interest rate adjustments. This allowed EURUSD to retrace towards 1.03 earlier this week as Treasury yields came back down to Earth. However, some US rate setting officials found this rhetoric damaging and incorrect. In their eyes, they were far from finished with the aggressive monetary tightening to trim inflation. Fed Presidents from San Francisco, Chicago and Cleveland all on Tuesday echoed similar views that they were far from done, sending yields and the Dollar higher once again.
Europe has and continues to suffer from soaring commodity prices. Commodities both hard and soft have skyrocketed in price following the pandemic and the Russian invasion of Ukraine. The attention has focussed on energy commodities, however, the broad rise in commodity prices has contributed to inflation and concerns in the Eurozone and global economies. A lot of those commodities that are still being delivered to Europe often find their way sailing up the Rhine river in Germany. However, the heatwave and seasonal tides have also taken their toll on this vital artery of European (commodity) trade.
If you’ve ever been to the region you’ll know that enormous wide yet shallow ships navigate the rather treacherous looking river appearing to carry everything from gas to grain. This river is now only centimetres away from being entirely unnavigable and causing yet further commodity supply and price constraints in Europe. Far from a drop in the ocean, in a time of fragile European and general growth sentiment, bad news continues to pile up for Europe. EURUSD reflecting these concerns yesterday retracing back to a 1.01 handle once again.
Discussion and Analysis by Charles Porter