Ahead of next week’s major central bank meetings and key data releases, the market’s focus has turned to trade tensions as the G7 meetings get underway in Canada and it looks like U.S. President Donald Trump is taking on the whole world. While leaders of the “G7-1” are showing great unity, Trump continues to isolate himself by demanding “fair” trade agreements especially with Canada and the European Union.
The G7 Summit comes into focus to finish out the week. One week after announcing tariffs on the EU, Canada and Mexico, President Trump will meet with leaders from Canada, France, Germany, Italy, Japan, the UK and the European Union. Tensions are due to run high, which also means the market’s low expectations should not create any surprise currency moves.
Ahead of next week’s major central bank meetings and key data releases, there have been some interesting moves in the markets with the euro/U.S. dollar currency pair in particular showing relative strength. Although the Federal Reserve is almost certain to raise interest rates next week, it is the European Central Bank which all of a sudden is looking to be the more anticipated meeting.
Friday’s “risk-on” rally, triggered in part by those strong US employment figures, followed through on Monday as Asian shares and U.S. index futures rose. Although Europe was also higher at the open, some of the major indices such as the German DAX gave up their earlier gains as investors considered the impact of U.S. import tariffs on metals and how this may impact European companies and their profits.
The U.S. dollar is higher against major pairs on Friday after a strong US jobs report was published. The U.S. nonfarm payrolls (NFP) report showed the economy added 223k jobs last month driving the unemployment rate to a 18-year low of 3.8 percent. Wage growth surprised to the upside with a 0.3% gain that validates the comments from U.S. Federal Reserve members about the need for more rate hikes this year.
The sentiment was already positive before the release of the US jobs report as Italian bond yields were lower for the third day due to diminished political concerns following the formation of a coalition government there. When the U.S. jobs report was published, this triggered a fresh rally in risk-sensitive assets as investors were relieved to learn the jobs market remained healthy after two months of poor showing.
While the focus of the wider market will undoubtedly remain largely on Italy and the ongoing volatility in the bond and stock markets, some forex traders’ focus will momentarily turn away from politics and back to economic fundamentals today. That’s because we have key data coming from the United States later on today while the Bank of Canada is also scheduled to make a rate announcement.
Yesterday’s FOMC Minutes brought exactly the lightbulb moment we not only expected but discussed at length since their meeting earlier this month. The only problem, how poor Eurozone growth and sentiment data has been. Even though the Federal Reserve has telegraphed that they are willing to let inflation run past their 2% target without forcing a faster pace of rate hikes, the dollar remains elevated.
Most policymakers were optimistic over the economic outlook, and felt it would “soon be appropriate” to raise interest rates if the U.S. outlook remains intact. However, the lack of clarity offered on rate hike timings beyond June simply left most investors empty-handed.