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Future of "monetary tightening" unknown - NBK report
June 26, 2017, 9:46 am
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In a generally calm week after the Fed hawkishly hiked interest rates, the future pace of monetary tightening is unknown. Oil prices tumbled to 15 month lows pushing down treasury yields and lower crude prices weakened inflationary pressures and in turn slowed the rise in yields, says a report released by the National Bank of Kuwait on Sunday.

With US inflation already slowing in the second quarter, anther fall in oil prices could hinder the Fed's plan for another rate hike in 2017. Even FOMC members seem conflicted on the pace of tightening. New York Fed President William Dudley reinforced expectations of another interest rate hike this year stating that inflation should rebound alongside wages as the labor market continues to improve. Dallas Fed President Robert Kaplan on the other hand, said that low US treasury yields suggest markets expect sluggish growth ahead and there needs to be more evidence that recent weak inflation is indeed transitory.

Polls see the FOMC passing on all Fed meetings this year with the December meeting being the most disputed at 60% for no hike.
The USD dollar traded in a relatively tight range only jumping up to a high of 97.87 after Fed Dudley's comments. The index then inched lower throughout the week as more promising data was released in Europe. Markets will be waiting for fresh new indicators to provide more insight on the Fed's plans.

In the UK, the Pound Sterling dropped to new lows as Bank of England governor Mark Carney dispelled expectations of an upcoming rate hike. Carney said "now is not the time to hike rates" citing weak wage growth and a likely hit to incomes as Britain prepares to leave the European Union. Last week 3 policy members voted in favor of tightening increasing expectations that a rate hike may not be too far off. Carney's comments sent the GBP to a two-month low of 1.2587.

However, cable moved higher erasing most of the its losses as Bank of England's chief economist Andy Haldane countered Carney's comments and voicing his support for a rate hike this year.

In Europe, the Euro followed suit trading in a tight range throughout the week only jumping higher on Friday after the release of optimistic manufacturing data. With Purchasing Manager's Index data being very strong in Europe this year and consumer confidence at a 16 year high, the EUR/USD reached a one week high of 1.1209. 

Source: KUNA

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