The market started the week taking a pause from its recent risk rally as it awaited the Federal Reserve rate decision on Wednesday. The market consolidated before the event wondering if the Fed would ‘remove the punchbowl’ from the party and this would halt the recent stock rally. In the event, the Fed did not change its policy rates or QE purchases. However, the Fed was very pessimistic on growth expecting the 4Q y/y growth rate to fall -6.5%. Fed’s Powell also said that, despite last month’s great NFP numbers, it could be years until some people find jobs again. This brought strong risk-off tones into the market on Thursday helped by second wave COVID-19 fears.

Key events from the past week

• USD: FOMC Rate Meeting, Wednesday, June 10. The most anticipated event of the week delivered little in terms of policy change. The outlook however is bleak with the ‘Dot Plot’ median forecast having no rate hike before the end of 2022 and only two FOMC members are looking for higher interest rates in 2022.
• EUR: German Trade Balance, Tuesday, June 09. The German trade balance was the worst reading since 1990 printing a record low surplus of +3.2bln. This shows that any COVID-19 bounce back is going to be tough for Europe’s leading nation.
• EUR: Eurozone GDP revised, Tuesday, June 09. One glimmer of hope this week was from the eurozone. GDP (q/q) for Q1 shrunk less then expected at -3.6% vs the -3.8% expected. This plays to the narrative that COVID-19 may hurt less than feared, but hard Q2 data is needed to confirm this expectation.

Key events for the coming week

• JPY: Bank Of Japan rate meeting, June 16. A Bloomberg survey has 72% of 47 economists expecting the BoJ to keep policy rates unchanged at -0.10%. The focus will be on whether the BoJ uses more measures to cushion the economy.
• GBP: UK interest rate meeting, June 18. No interest rate change expected, but speculation is rising about the Bank of England using negative interest rates. If interest rates are cut to negative then expect GBP selling on the surprise move.
• Potential market movers, Headline risks remain. These are from Brexit, US-China trade tensions, China-Australia tensions, headwinds from the ‘frugal four’ on the European relief fund, and that is without even mentioning the second wave infection risk from COVID-19. Any of these events can trigger risk-averse markets and JPY/CHF strength.