- Rates: Fed governors give final dovish push
The short term US rate market is roughly split about the outcome of the July FOMC meeting (25 bps or 50 bps rate cut) after final dovish Fed comments ahead of the blackout period. Today’s eco calendar is rather uneventful suggesting sentiment-driven and technical trading ahead of the weekend. - Currencies: Dollar declines as market revives aggressive rate cut bets
Yesterday, the dollar ceded further ground. US Treasury secretary Mnuchin indicated no change in the USD policy, for now, but it might become an issue later. The dollar lost further interest rate support after Fed Williams subscribed the case for pre-emptive Fed action. Positive UK eco and political news triggered a sterling short squeeze after recent protracted decline
The Sunrise Headlines
- Wall Street managed a close in green after Fed Williams’ (unintended?) hint at aggressive monetary policy. The S&P500 outperformed (+0.36%). Asian equities also profit with Japan outperforming (+2%).
- NY Fed Williams said that in a low interest rate environment a worsening economy requires ‘swift action’, prompting bets on a 50 bps cut end of July. The NY Fed downplayed his remarks as academical rather than policy guidance.
- The US shot down an Iranian drone which was said to threaten the safety of an American vessel near the Strait of Hormuz. It is the latest sign of increased geopolitical tensions between the two countries over Iran’s nuclear programme.
- Japanese June inflation remains subdued with some core measures (0.6% YoY) slowing to the weakest in almost 2 years, adding to speculation the BoJ could adopt an even more easier policy stance later this month. The yen declines.
- The US House passed legislation on Thursday to raise the minimum wage to $15 an hour by October 2025. That would be more than a doubling of the current $7.25. The bill still has to pass a Republican-controlled Senate however.
- Spain’s Podemos said they would only back Sanchez (Socialists) as PM during a vote next week if they get key positions in his future cabinet, something Sanchez refused to offer so far. November repeat elections are ever more likely.
- Today’s economic calendar is rather thin with only the University of Michigan consumer confidence (July) scheduled for release. Fed’s Bullard and Rosengren give speeches
Currencies: Dollar Declines As Market Revives Aggressive Rate Cut Bets
Dollar declines on soft Fed talk
Several events triggered profit taking on USD longs and supported EUR/USD yesterday. Initially, the dollar suffered from a risk-off related decline in core yields. EUR/USD returned temporarily to the low 1.12 area on headlines that ECB was studying a (soft) revamp of its policy framework. Later, the dollar met new headwinds, too. US Treasury Secretary Mnuchin said that there is no change in the dollar policy for now but that it can be considered in future. Finally, Fed Williams in a speech reiterated the need for pre-emptive central bank action, fuelling speculation on a rate cut. EUR/USD closed the day at 1.1277 (from 1.1244). USD/JPY finished at 107.30 (from 107.95).
This morning, Asian equities are also propelled by hopes on aggressive easing by the Fed (and by other CB’s). Still, the dollar recoups some of yesterday’s loss after the NY Fed clarified that Williams didn’t intend to signal a big rate cut this month. EUR/USD is changing hands in the 1.1260 area. USD/JPY rebounded to the mid 107 area.
Later today, there are again no EMU data. In the US, the U. of Michigan consumer confidence is expected to stay at a historically high level (98.8). Fed’s Bullard and Rosengren are last Fed governors with a chance to guide markets ahead of blackout period before the end of July meeting. Whatever the guidance of those governors, the market feels ever more comfortable to err to dovish side when making up their mind on CB action. Quite some Fed easing is currently already discounted. However, bets on substantial Fed easing this month or further out this year will probably cap any meaningful USD rebound. The EUR/USD 1.1181 support looks solid short-term. Global picture: EUR/USD drifted lower in the 1.11/1.14 range but rebounded (temporary?) after Powell paved the way for a July rate cut. A rebound to the 1.13 would ease the downside momentum. With the most important data before the July FOMC meeting printed, more trading near current levels is likely.
The news flow finally turned sterling supportive yesterday. EU’s Barnier suggested there is some room to discuss the Irish, backstop, UK retail sales were strong, and Parliament made it less easy for the next PM to push through a nodeal Brexit. The sterling short-squeeze pushed EUR/GBP back below 0.90. USD selling reinforced the rebound in cable (1.2550 area tested). Today, there are only second tier UK eco data. The protracted sterling downtrend apparently found a ST bottom as investors await the appointment of a new UK PM next week. We expect more technical trading ahead of the July 23.
EUR/USD: dollar declines on new Fed rate cut bets
