Recent experience would suggest that geopolitical risks are unlikely to dampen investors demand for risk assets sustainably. However, caution may still be warranted.
Limited room of central banks such as the Fed, ECB and BoJ turning more dovish in the short-term as well as broadly capped global growth momentum are likely to keep investors’ demand for risk assets muted. It must be noted too that most recent comments by Fed members support the view of at least two more hikes this year. Evans said that two rate increases this year are not at all unreasonable while Harker stressed that he backs more rate hikes than the median dots forecast. With markets still pricing in less than what the Fed and our economists forecast, the greenback should stay subject to upside risk.
The GBP was among the weakest currencies of late, mainly on the back of the notion that this week’s terrorist attacks may increase the probability of the UK leaving the EU. Even if the latest events have influenced sentiment, we do not expect it to have sustainable impact. Even if Brexit fears are likely to keep the currency capped, limited room of falling rate expectations should keep the downside limited from here. Accordingly we stay of the view that the currency should trade in a broader range for the coming few weeks.
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