On June 23rd, influenced by the resilience of the US economy and the more hawkish stance adopted by new Federal Reserve Chair Kevin Warsh, both Bank of America Global Research and Deutsche Bank now forecast that the Fed will raise interest rates this year. This marks a shift from both institutions' previous predictions that rates would remain unchanged.
Bank of America stated on Monday that it expects the Fed to implement three 25-basis-point hikes in September, October, and December, raising the benchmark rate from the current 3.5%-3.75% range to 4.25%-4.5%. This represents one of the most aggressive rate hike expectations among major global investment banks.
In a report released on June 19th, Deutsche Bank predicted the Fed would raise rates twice this year by 25 basis points each, occurring in September and December.
The backdrop for these revised forecasts from both banks is the Fed's decision last week to hold the benchmark rate steady, while nearly half of its policymakers indicated they anticipate rate increases this year.
Furthermore, with the conclusion of the first round of talks between US and Iranian delegations in Bürgenstock, Switzerland, the two nations have moved a step closer to a final peace agreement. Subsequently, Goldman Sachs lowered its 12-month probability of a US economic recession from 25% to 15%. Goldman Sachs Chief Economist Jan Hatzius noted this revision benefits from reduced downside risks to the US economic outlook and improved resilience in labor market fundamentals.
The 15% figure represents the firm's long-term average expectation for the US economy. Prior to the outbreak of the Iran conflict, Goldman's recession risk expectation was 20%, which rose to 25% after the war began. Now, with the dawn of peace approaching and US labor market performance showing improvement, the team has revised this expectation down to 15%.
In addition to this revision, Goldman also raised its forecast for US second-half GDP growth to 2%, reflecting "positive momentum in real income growth due to falling natural gas prices, while the US economy continues to benefit from the AI boom, manifested in increased stock wealth and robust capital expenditure."
Key data to watch today includes the Eurozone's preliminary June SPGI Manufacturing PMI, the UK's preliminary June SPGI Services PMI, the UK's June CBI Industrial Order Expectations, and the US's final June SPGI Manufacturing PMI.
Gold/US Dollar
Gold edged higher yesterday, closing with modest gains, and is currently trading around 4130. In addition to short-covering providing some support, the easing of Middle East tensions, which dampened safe-haven demand for the US dollar, was also a significant factor supporting gold's rebound. However, persistently rising expectations for Fed rate hikes limited the metal's upward momentum. Focus today is on resistance near 4180, with support around 4080.
US Dollar/Japanese Yen
The USD/JPY pair moved higher yesterday, closing with slight gains, and is currently trading around 161.60. Continued firming expectations for Fed rate hikes provided ongoing support for the pair, alongside widening US-Japan interest rate differentials. However, diminished safe-haven demand for the dollar, coupled with expectations for Bank of Japan rate hikes and concerns about potential renewed Japanese FX intervention, capped the pair's upside. Focus today is on resistance near 162.50, with support around 160.50.
US Dollar/Canadian Dollar
The USD/CAD pair declined yesterday, closing with minor losses, and is currently trading around 1.4170. Profit-taking exerted some downward pressure, and the easing of Middle East tensions, which reduced safe-haven demand for the dollar, also weighed on the pair. However, a drop in crude oil prices limited its decline. Focus today is on resistance near 1.4250, with support around 1.4100.
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