With high recession risks, the US dollar seems like an ideal safe haven for investors.
Markets remain underwhelming, with the euro rapidly approaching parity even as it holds above 20-year lows this morning in Europe. The yen has fallen to its lowest level in more than 20 years, the pound sterling is close to its lowest level since March 2020 and the Russian ruble is down 16% this week.
The situation will not change until the Federal Reserve slows down its cycle of aggressive rate hikes. In the minutes of the Fed’s June meeting, released on Wednesday, the FOMC confirmed a shift in priority towards price stability over full employment.
Unsurprisingly, Treasury yields soared on Wednesday, and the yield curve, measured by the gap between 2 and 10 year yields, continues to move further into inverted territory.
Bond markets suspect aggressive rate hikes to curb inflation, raising the risk of a recession in the world’s largest economy.
At the same time, recession fears linger as global shares hover between rising fears and relief that a slowdown could contain a sharp rise in borrowing costs.
Asian shares rose, while futures for European and US stocks strengthened.
US employment data will be in the spotlight later ahead of Friday’s nonfarm payrolls report.
In the UK, markets are now factoring in political unrest, but the latest news is gaining attention as British Prime Minister Boris Johnson defies pressure to step down and faces a growing uprising within his ruling party.
And perhaps this is another reason to stay away from the pound right now and play it safe by sticking to the dollar.
Key events to kick-start markets on Thursday: Sergei Lavrov attends the G20 foreign ministers’ meeting; UK house prices rose 13% in the 12 months to June; The volume of industrial production in Germany grew in May less than expected; US ADP Salary; Central bank meetings: Argentina, Poland, Peru, Sri Lanka, Serbia.
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