Dollar higher after Fed hike and dovish ECB

June 15, 2018 09:25 PM

The U.S. dollar gained against all major pairs this week. A hawkish Fed and a dovish European Central Bank (ECB) gave the edge to the American currency. U.S. President Donald Trump scored diplomacy points in Singapore by meeting with North Korean leader Kim. Trade war fears were once again at the forefront as the Trump Administration announced new tariffs on Chinese goods on Friday. Crude oil prices plunged as supply might be on the rise with heavy anticipation on the Organization of the Petroleum Exporting Countries (OPEC) meeting on Friday.

Central Bank Divergence Gives USD Edge Over EUR

The euro/U.S. dollar (EUR/USD) currency pair lost 1.37% in the last five days. The single currency is trading at 1.1606 after the Fed and the ECB both announced tightening monetary policies. The U.S. central bank hiked its benchmark rate as expected by 25 basis points. The dollar support from the Fed did not stop there with more optimistic projections and Fed Chair Powell sharing his confidence in the U.S. economy. The report that the White House was readying the list of tariffs on Chinese goods capped the rise of the USD on Wednesday.

The ECB also made a monumental announcement this week to end its QE program but it was also accompanied by a dovish assessment of the economy by saying that rates will be on hold at least a year. The move is in line with the reality of the European economy, as much as the Fed hike is an endorsement of the pace of the growth of America. Next week will offer more chances for central bankers to spout their diverging views when they meet in Portugal for the ECB Forum on Central Banking.

The tariffs against Chinese goods weighted on the USD on Friday ahead of an economic calendar that will be heavy with central bank rhetoric. US data will be largely absent with building permits and the Philly Fed manufacturing index the stand out indicator releases. The European data calendar looks thin until the end of the week with flash PMI data to give a more forward-looking insight into the European economy.

Canadian Dollar Lower After Fed and Trade War Concerns

The U.S. dollar/Canadian dollar (USD/CAD) currency pair surged 2.01% during the week. The currency pair is trading at 1.3185 after the double whammy of a Fed hike and U.S. trade tariffs. Although the higher duties are not applied to Canada directly the fate of NAFTA remains cloudy. Canadian officials did their best to remind everyone that the deal is still on the table and nudged U.S. negotiators to get back on the table. The biggest hurdle going forward would be the political interference as the preferred window of negotiations is now closed. Mexican presidential elections will take place on July 1, which could mean a new team on the Mexican side.

The Canadian dollar is near a one year low against the USD. Fundamental indicators have softened north of the American border with manufacturing sales falling 1.3% on Friday. Oil prices offered little positive support as the upcoming OPEC meeting on Friday will shape the face of global crude supply. Analysts are expecting higher production, which are not being priced with a tumble in crude.

Canadian dollar weekly graph June 11, 2018

OPEC Meeting to Keep Oil Prices Under Pressure 

Crude oil fell in the last week. The price of West Texas Intermediate is trading at $64.90 far from the weekly highs at around the $67 level. The Organization of the Petroleum Exporting Countries (OPEC) will meet in Vienna on June 22 and ahead of that meeting, there are rumours circling about that Russia and Saudi Arabia point to a softening of the production limits. The deal did, in fact, stabilize prices that were in free fall, but producers are divided on the need to relax the supply limits.

The OPEC is divided internally as Iran and Venezuela have had disruptions to their supply and would prefer the group maintains lower levels across the board. Saudi Arabia could find common ground and compromise in a smaller increase.

About the Author