Bets on Fed rate cuts tank greenback
June 4, 2019
The greenback experienced a good old fashioned hammering yesterday after St. Louis Federal Reserve President James Bullard was the first voting Federal Open Market Committee member who explicitly hinted at the need for Fed rate cuts on the short run. Together with a fall in core inflation and a breakdown of trade talks earlier, this dovish squawk sent the probability of a rate cut by September as implied by futures markets to above 90%. Today at 14:55 BST Fed Chair Jerome Powell will speak on monetary policy and the big question is whether he will also put the door ajar for the possibility of rate cuts in the near future. From our perspective this seems unlikely, as current growth is still solid, unemployment is near multi-decade lows and wage growth is near the highest levels last seen in 2009. This should give the Fed Chair the room to remain patient, without looking passive, which implies markets may be caught overly long on their bets to on more imminent Fed rate cuts. A good chance for volatility around Powell’s speech this afternoon is expected, with chances of a dollar rally if he confirms the Fed’s current neutral stance. Meanwhile, trade tensions were often mentioned by respondents of ISM’s Manufacturing PMI, leading to the lowest score since December 2016 at 52.1.
“The Don” wasn’t able to pull sterling into the FX market limelight yesterday, as Donald Trump’s visit to the UK kept news wires busy without having any discernable impacts on GBP. The Manufacturing Purchasing Manager Index showed a sharp drop for May to 49.4 after a stockpiling-led surge before the 29th of March supposedly Brexit departure date send the index to 53.1 in April. Today we expect to get more clarity from the 1922 committee as they meet to set the rules for the Conservative Party leadership contest. Much like the hunger games, there are currently many candidates and only one can survive in the end, which is why the 1922 Committee wants to speed up the process by changing the rules of the procedure. Instead of one candidate being eliminated per week, the plan may become to have every contender with less than 10+ public supports drop out of the race after the first round. The trimming down of the number of potential new Prime Ministers should then quickly give us more clarity on the Brexit agenda of the most likely new leaders, which will determine sterling’s course over the coming weeks.
The single currency sneaked towards the top of the G10 currency board yesterday, despite – once again – rather bleak survey data from the manufacturing sector. The Final Manufacturing Purchasing Manager Index came in at 47.7 and showed weaker domestic as well as external demand as a recurring theme. This then led to a decline in work backlogs, which likely caused employment to fall for the first time in 56 months. To make matters worse, new orders fell for the 8th consecutive month, which adds downside risks for Q3 on top of the bad omens for Q2 manufacturing growth. Today at 10:00 BST we see Eurozone inflation, which may continue to be very gravity bound after the minor misses in Germany, France, Spain and Italy last week on their preliminary figures.
The loonie resided in the middle of the G10 currency board yesterday, despite marginally softer manufacturing survey data. The ISM Manufacturing PMI fell to 49.1 in May as it told a story of concerns about trade that echoed all throughout other PMIs across the globe as well. Details were dismal in the report, as New Orders fell to the lowest level in three years and all components except for employment had a negative impact on the headline reading. Today sees now Canadian data of note, which means we’ll have to wait for Thursday’s Trade Balance data and Friday’s Labour market report for further data-driven moves on the currency.