The dollar jumped to a three-week high, thanks to a positive start to the US and North Korean summit in Singapore. Trump said that he was sure that the parties would be able to reach a peace agreement from the very first minute. However, the positive mood of the markets could easily shift to pessimism, if disagreements arise during the negotiations.
Kim wants to lift international sanctions, and Trump pursues denuclearization and possibly demilitarization of the North Korea, which has been developing nuclear weapons for a long time and could potentially hit the North American continent. However, it is clear that Kim will not be so easily deprived of his only advantage, since then the country will turn into an ordinary republic in East Asia, which everyone will very quickly forget about.
It is difficult to say what can be called a successful summit with North Korea, given how many times previous negotiations collapsed. Therefore, the risks of pullback or a profit-taking move after the results are quite high and additional dollar gains are unlikely to occur. In addition, it is likely that if the meeting fails, it will impact the markets, while it is unlikely that it will give an additional impetus in case of a positive outcome.
However, the decision of the Fed on Wednesday is coming up and it is anticipated that the regulator may take the expected decision to raise the rate. Strong payroll reports in May allows us to be fairly confident of this development. The data on consumer inflation in the US in May are of great uncertainty. The key indicator is expected to grow from 2.1% in April to 2.2% in May, with the main reason for optimism to be the growth of wages in May, which exceeded expectations. Today, ZEW’s expectations of the corporate environment will also be published. The indicator of for the euro zone is expected to fall to -14.2 points, against -8.2 in the previous month.
Leading indicators are important for the markets, as they give an indirect assessment of the desire of managers of companies to make investment decisions, form expectations for the future growth of domestic and external demand for goods, and also express the readiness of managers to increase hiring. Given that the euro area’s economy has been growing on orders from abroad, while domestic consumer demand has remained weak, the leading indicators can provide valuable information on how company managers perceive the current tensions in world trade and whether they will respond to it appropriately at the level of corporate decisions. For them, the main source of uncertainty is the tariff threat of Trump, in particular on German cars, because the automotive sector of Germany employs almost 1 million people and the increase in tariffs may indirectly affect employment.
The ECB meeting causes investors more questions than raising the interest rate of the Fed, as the European regulator has to make a decision in a more difficult economic situation. However, the transition to normalization of politics will mean the confidence of officials, in that the economy has chosen a growth trajectory no longer dependent on quantitative easing. In addition, the stock of the “move” at the Fed is reducing, while the ECB will be at the beginning of the path in terms of tightening the policy, therefore, long-term positions on growth look attractive for EURUSD, which provide stability for the pair near the level of 1.18. Inflation in the eurozone in May rose sharply to 1.9%, but it consistently declined all previous months in 2018, which explains the low reliability of these data in predicting the actions of the ECB. Nevertheless, German bonds perceived the data as a possible signal of economic recovery, falling in price since early June.
The yield of US bonds on the contrary grows, (i.e., their price decreases), therefore, driven by the search for more yield growth potential, investors will view the European market as more favorable. Correction of the European indices is likely to expand after the decision of the ECB, the German DAX is considering the possibility of descent from the highs to the level of 11750-12000. Quiet gold moves near the level of 1301, which is sensitive to changes in the cost of borrowing in the US, suggests that the Fed’s decision will not bring new information, so trade decisions will be based on information coming from beyond the Atlantic.