Dollar and gas are going up

The dollar regained some ground at the start of the month despite a reduced trading volume due to the Independence Day holiday in the US and the start of the traditionally less active summer period. The euro-dollar parity had ended the first half of the year at 1.0485, but plunging to 1.0235 yesterday – the lowest level since late 2002, nearly 20 years ago. Fears of a sharp economic slowdown as central banks respond to inflation are leading market participants to favour the dollar. Thursday’s release of the Personal Consumption Expenditures (PCE) price index came out in May at 6.3% on an annual basis, just like the previous month. Some analysts are already interpreting it as a slowdown in inflation and changing their bets on the Fed’s next decision accordingly. An 75–basis point hike is still the expected scenario. However, the probability of there being only a 50–basis point hike at the next meeting on 27 July has risen to 20% from a 6% before. The half-point scenarios is looking more of a possibility as the Fed sees the economy slowing down. With household purchasing power due to high inflation – real household disposable income contracted by 0.1% in May – consumer spending contracted by 0.4% in volume terms in May after a 0.3% increase in April. The industry is also showing signs of slowing down. With earnings deteriorating per the purchasing managers’ survey in June, there are fears of a recession in the US in the coming months. The PMI fell sharply to 52.7 points from 57 points in May. New orders are down for the first time in two years at 49.2 points (figures below the 50-point mark point to a contracting, rather than expanding, economy). The release of the Fed minutes tomorrow will be important as it could provide further insight into the direction of US monetary policy ahead of Friday’s US employment figures.

In Switzerland, too, consumer prices rose sharply in June, still driven by soaring oil and gas prices but also by some food products. The consumer price index accelerated by 3.4% year-on-year in June after rising by 2.9% in May, 2.5% in April and 2.4% in March. This is the highest level in 29 years. Such constant increases are reinforcing the SNB’s decision to raise interest rates without waiting for the European Central Bank in order to contain inflationary pressures and the upward pressure on property prices. Moving ahead of the ECB is now possible because the franc is no longer overvalued against the single currency. The Swiss National Bank has changed the vocabulary that everyone analyses to estimate the degree of intervention in the currency market. Until 2017, the SNB saw the franc as ‘significantly overvalued’. Starting in September 2017, it referred to a ‘highly valued’ franc. On 16 June, the SNB only indicated that it was prepared to be active in the foreign exchange market if necessary. Such a remark suggests it is not troubled by a euro below parity for the time being, which opens the door to further appreciation. At least until the ECB takes its first decisions to raise interest rates, that is. The single currency currently sits at its lowest level since January 2015 and the surprise decision to abandon the floor rate.