The complacency that has crept into most asset markets over recent weeks was showing some signs of abating last week. The VIX measure of equity volatility moved further away from the multi-year lows that were recorded earlier this month. The situation in Iraq has also had a bearing on markets, lifting both the oil price and gold towards the end of the week. For currencies, the impact is less obvious, with the traditional safe haven currencies of both the yen and Swiss franc only modestly firmer vs. the middle of last week. As we start a new trading week, sterling has briefly pushed the 1.70 level on cable, the currency still feeling the effects of BoE Governor Carney’s speech of last week, suggesting that rates may move early as this year. EURGBP is also holding below the 0.80 level, only having seen two up days in the past two weeks.
For this week, the Fed stands tall on the calendar. There is little expectation for a shift from the current pace of tapering of USD 10 bln, It will be the statement where the potential for impact on the dollar stems from. The real focus will be if there is any reflection of the weakness seen in the first quarter (likely to be revised lower) in the statement and the forward guidance. The dollar has so far struggled for sustained further strength so far this month, the dollar index having pulled back from the 81 high seen earlier in June. The other key focus this week will be the minutes to the June MPC meeting, also on Wednesday, when there is a decent chance that we could see at least one member voting for higher rates, which would give further support to sterling at these higher levels.