Bullard rains on the USD bears’ parade

In an interview with Bloomberg, voting Federal Open Market Committee member ´James Bullard, who dissented on the June FOMC decision in favour of a cut, argued that he would support a 25-basis point cut at the July meeting. As the current argument is whether the Fed goes for a bigger 50 basis point cut in July (20% probability currently), this looks on the “hawkish” side of expectations, coming from the Fed’s most aggressive voting dove. This comment, as well perhaps as the news that a US district court found three large Chinese banks in violation of North Korean sanctions, saw a dive in risk appetite and a consolidation in almost all of the recently moving parts across markets – gold consolidated sharply, the USD bounced, and risk sentiment weakened. 

Fed chair Jay Powell was perhaps less dovish at the margin in a speech yesterday as well, taking some of the  wind out of the USD bears’ sails. While he did confirm the bias for a rate cut on heightened concerns for the outlook, he insisted that the economic outlook is still “favorable” and defensively said  that the Fed would not “overreact” to data and sentiment swings.

Yesterday we registered a very ugly 10-point drop in the US Conference Board Consumer Confidence reading in June, with the survey now poised at the same level as back in January, which was in turn the lowest level since September of 2017. This time around, confidence has weakened sharply without the semi-crash in equity markets we saw into year end of 2018. Consumer confidence measures correlate best with jobs numbers and the most high frequency jobs data we can observe are the initial weekly jobless claims, which would likely start to show elevated readings on a moving average basis if confidence is deteriorating. We don’t have evidence of a rise in claims just yet – more of a flattening after years of falling claims numbers, but these bear watching more closely. If we print a near-zero nonfarm payrolls change or worse next week, we should be able to ignore Bullard’s words and expect more aggressive easing from the Fed.

From here, we’re on to the upcoming G20 meeting and quarter-end effects with the market entirely unsure how to price the former, while for the latter, we’ll focus most on how bonds behave after quarter end after the US 10-year benchmark yield dropped 40 basis points during the  quarter and has reached the round 2.00% yield level.

Trading interest

Buying EURUSD dips with stops below 1.1300 on daily closing basis. 
Short EURNOK with stops above 9.71 for a go at well below 9.60
Long AUDUSD but looking to take tactical profits on a squeeze above 0.7000

Chart: EURUSD

For EURUSD to continue higher here, the pair  needs to find support in the  1.1350 area ideally, and certainly needs to avoid a run below 1.1300. Note the 200-day moving average coming in around the  higher level and that this was also the local pivot high.