Today’s Key Market Drivers: 23rd July 2018

“Mario Draghi will advise the ECB’s decision on Thursday.”

The US Dollar finished the week on the back foot after comments from US President Trump that he was not happy about two more rate hikes in 2018 and he wasn’t happy about the US Dollar rising in value. Trump better get comfortable with the US Dollar’s popularity as it’s only going to grow stronger amongst traders in coming quarters. Last week US Fed Chairman Jerome Powell said the US economy was gearing up for years of solid and prosperous economic growth with solid jobs gains and the Fed still planned to raise the official cash rate two more times in 2018. That sent traders scrambling to buy more US Dollar assets and with only two other major Central Banks (BOC and BOE) likely to lift rates along with the Fed this year, any pullback on the US Dollar will be viewed as another opportunity to load up and get long.

The European Central Bank is the only major central bank reporting this week and traders don’t anticipate the ECB to adjust monetary policy at its July meeting. The bank has already indicated that it has extended its current stimulus program until December and has no intention to raise the official cash rate in 2018. Traders don’t expect the ECB to move on its 0% interest rate policy until the second half of 2019 and therefore the Euro is likely going to remain under pressure against the US Dollar unless second-half economic data for 2018 shows better than expected growth and improved inflation figures across Europe. There is no question in my mind the Euro will move higher in 2019 and it could move substantially higher against the likes of the Aussie and Kiwi Dollars once traders receive the news that the ECB is beginning its interest rate tightening cycle.

I continue to see more and more articles about the looming housing & mortgage crisis about to hit Australia. You can just about find one every day popping up on online news sites. Sure, the media like to beat up these topics to get your attention, however, I genuinely don’t think this is a beat up, the looming mortgage crisis could be a tipping point for the Aussie economy to roll over into a recession in 2019 if households decide they must stop spending to pay the mortgage. In my view, there is no way the RBA is in a position to raise the official interest rate in 2018 and with the US Fed committed to higher interest rates in the USA the probability is the Aussie Dollar is destined for considerably lower levels against the greenback. At the end of 2019, it is possible the official cash rate at the US Fed will be 3% or higher and the RBA will still be at 1.5% or maybe even 1.25% if we see a downturn in the economy, making the differential 1.5% in the US Fed’s favour. I simply cannot see how the AUD v USD goes higher overall against such a large and growing interest rate differential. Give me one good reason why the market should buy Aussie Dollars or Kiwi Dollars over US Dollars in the coming 12 months. It won’t be a straight line down for the AUD and NZD, there will be pullbacks along the way but with such a widening interest rate gap history shows the country with a lower interest rate has a lower currency value.

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About the Author: Andrew Barnett

Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).

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