• Rates: Fed paves the way for rate cuts
    The Fed’s dovish message confirmed market expectations of rate cuts going forward, albeit not to the same extent as investors currently discount. US yields tanked nonetheless with the US10y 2.01% under heavy pressure. Both the ECB and the Fed are likely to reverberate through global bond markets today, limiting any yield upside in the short term.
  • Currencies: EUR/USD rebounds as Fed rate cut hope counterbalances ECB easing bias
    The dollar was sold yesterday as the Fed signaled to be prepared to start substantial rate cuts soon, if necessary to protect the economy from current uncertainties. For now, the dollar might develop some kind of an asymmetric reaction function, with negative US data outweighing strong ones. Sterling traders look out whether the BoE will leave its tightening bias

The Sunrise Headlines

  • US equities managed to eke out gains after the Fed signalled rate cut(s) ahead. The Nasdaq outperformed (+0.42%). Asian markets are propelled higher with China as a clear outperformer (+2-3%).
  • The Fed kept its policy unchanged, but now holds a clear easing bias. Rate cuts are coming unless we’ll see a dramatic improvement in eco data. 7 out of 17 governors already insist on a 50 bps rate cut this year.
  • The Bank of Japan kept its monetary policy unchanged this morning. BoJ governor Kuroda delivers a press conference later today and is expected to signal an easing bias as well.
  • RBA governor Lowe said that the possibility of lower interest rates remains on the table as spare capacity persists. He also called on the government for action on fiscal stimulus.
  • Rory Stewart is eliminated in the Tory leadership contest. Boris Johnson’s lead extended by 17 votes to 143 as 4 contestants enter the final two rounds of voting before the two leaders go head-to-head in a full party member ballot..
  • New Zealand’s economy grew by 0.6% Q/Q and 2.5% Y/Y in the first quarter. Details showed weakness in consumer spending and the services sector with construction filling the gap.
  • Today’s eco calendar contains weekly jobless claims and Philly Fed Business Outlook. The Norges Bank and Bank of England decide on monetary policy. Spain & France tap the bond market

Currencies: EUR/USD Rebounds As Fed Rate Cut Hope Counterbalances ECB Easing Bias

Dollar declines as Fed is close to cutting rates

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The dollar traded with a tentative negative bias ahead of the Fed decision. The Fed left rates unchanged but is closely monitoring whether uncertainties that are weighing on the economy will call fur policy accommodation in the near term. The dots indicate that the case for rate cuts later this year is building within the FOMC. Even a 50 bp rate cut in a not that distant future is possible. US yields and the dollar declined further. On the dollar, Fed’s Powell repeated that the Treasury is responsible for FX. The Fed doesn’t target the dollar. EUR/USD closed at 1.1226, well off the intraday peak. USD/JPY finished at 108.10.

The Fed-inspired risk rally continues in Asia this morning. China outperforms. Japan underperforms. The BOJ left its policy unchanged, but the Bank is coming under growing pressure to join the easing stance of the ECB and the Fed. USD/JPY dropped further (currently near 107.65). A further slide in US yields is supporting EUR/USD (1.1265 area).

The yuan also strengthens against an overall weaker dollar (USD/CNY 6.8675). RBA’s Lowe said that it wasn’t unrealistic to expect a further rate cut and called for fiscal stimulus, too. The gain of the Aussie dollar against the USD is modest. (AUD/USD 0.6890).

Today, there are few data in Europe. In the US, the jobless claims and the Philly Fed business outlook are not the most high profile data series, but any signs of weakness might weigh on the dollar.

Earlier this week, euro weakness prevailed as Draghi signalled further ECB easing. The Fed at least restored the balance of softness, as it showed to be close to cutting rates soon if necessary. Any Fed action is still data-depended. Even so, we see an asymmetrical reaction function for the dollar, with the US currency being more sensitive to negative rather than to positive news. EUR/USD support at 1.1180/1.1107 looks solid. EUR/USD probably entered a buy-on-dips pattern for return action higher in the 1.1180/1.1350 trading range.

EUR/GBP lost gradually further ground yesterday and closed below the 0.89 handle. Boris Johnson becoming the next UK PM looks more or less discounted. Today, the UK calendar is well filled with the retail sales and the BoE policy decision. Markets will closely monitor whether the BoE keeps its guidance for gradual rate hikes. The market already for quite some time sees this call as unlikely, but the BoE might wait till the August inflation report the chance its assessment. Even so, The BoE shifting to a more neutral bias might be a (modest negative) for sterling.

EUR/USD rebounds as prospect for substantial Fed rate cuts (more than) counterbalances ECB’s easing bias

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