Global Head of Macro Strategy
Résumé: The market is expecting little from today’s FOMC meeting, and geopolitical distractions abound, but the Fed would do well to open the door more widely for a July rate cut. The USD outlook looks pivotal after yesterday’s backup. Elsewhere, sterling is on the skids and could fall further.
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Key developments and comments:
The US dollar firmed yesterday despite a soft US May Retail sales report yesterday, perhaps driven by squaring of stale short USD positioning at the margin ahead of tonight’s FOMC meeting. Still, it is difficult to conjure a hawkish scenario on that meeting tonight’s FOMC meeting with odds at only about 15% for a July cut and only a bit over 55% for a single cut through the mid-September FOMC meeting (FOMC preview below). Besides the tariff issue, do people really think that the high oil prices from the Iran-Israel conflict rate high on the Fed’s concern list if US labor market data continues to worsen badly? On that note, the interest scenario for the USD today is a new local high in the weekly jobless claims and continuing claims levels and perhaps May US housing starts data that is worse than expected as well. The risk of a weak housing market to sentiment and the US consumer is badly underestimated. A softer jobs market and rising unemployment could create far more forced selling that sees the pandemic-inflated bubble deflating rapidly. Inventories are already rising sharply and the latest NAHB survey of homebuilders dropped to the third-lowest level since 2012 for the June survey that was out yesterday.
EURUSD has challenged below key local support just below 1.1500, but arguably would need to capitulate through the 1.1450-1.1400 to suggest a more profound reversal – awaiting the post-FOMC price action for a status.
The yen firmed a bit yesterday on weak global risk sentiment, curbing enthusiasm for carry trades, with GBPJPY seeing the most significant reversal lower after it teased the top of the multi-month range. USDJPY resistance around 145.00 held again, as a squeeze as high as 145.44 overnight yielded to a push back toward the round level once again in late Asian trading.
Sterling weakened sharply yesterday across the board, as the currency is perhaps sensitive to risk sentiment. GBPUSD fell as far as 1.3422 overnight after trading as high as 1.3591 yesterday and EURGBP rallied above 0.8550 for the first time since April. The UK May CPI data this morning failed to drive any strong new view on the Bank of England meeting tomorrow, with Core inflation in at 3.5% as expected, down from 3.8% in April, while the Core Services number fell to 4.7% versus 4.8% expected and vs. 5.4% in April.
Chart: USDJPY
The USDJPY pair has been too quiet in recent weeks and feels ready for a slight narrative shift if today’s US data and the FOMC meeting grab the market’s attention on greater risks of an incoming US recession, but as well if the Iran-Israel confrontation raises concerns. Theoretically, Japan is vulnerable on that account due to its energy import dependencies, but the greater factor for the JPY may be financial flows, with plenty of signs of heavy duty carry trading in recent weeks that could be in for an ugly reversal if global markets tilt into a more decidedly risk-off mode. For now, tactically, the sloppy resistance area above 145.00 is the focus, while a chunky sell-off is needed (likely would need risk-off and dovish Fed) that threatens the 142.50 area again to set up some follow-through to 140.00 and beyond to the downside.
Final FOMC preview
We have a dovish lean on today’s FOMC, with the Fed indicating a stronger willingness to move in July (couched in “incoming data” and rising concern levels, no pre-committing, etc.) though admittedly with the risk that Powell remains stubborn. The market seems to be expecting almost nothing from this FOMC meeting, only that the Fed will adjust its dot-plot for this year to reflect two rate cuts. The market can’t take any of the Fed economic projections seriously and should only focus on the dot plot, given the massive uncertainties generated by Trump 2.0. As well, we can put all our chips on Trump nominating a avowedly dovish new Fed Chair from next May, perhaps Scott Bessent himself, who will loudly proclaim that he will crush rates as soon as assuming the chair. The Fed could end up cutting 100 to 125 basis points this year on any material rise in the unemployment rate to above 4.5%. A weird “muddle along” economy with falling CPI is needed to produce the expected 50 basis points cut scenario. It seems more likely to me that it is a case of either/or: either get more cuts than expected or fewer or no cuts.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
SEK has been quiet ahead of the Riksbank today – NOK has stolen the limelight with the massive backup in crude oil prices. Sterling is the big loser over the last week and could be in for a further pummeling if risk appetite is in for a bigger correction here. Remember we have interesting BoE and SNB meetings tomorrow (in particular will SNB go negative in one swoop with a 50 bps chop?)
Table: NEW FX Board Trend Scoreboard for individual pairs.
The new EURGBP bull trend was well picked up by the FX Board last week as it has seen solid follow-through, while the USDJPY trend flip-flop is not worth paying attention to until we clear the choppy range well above 145 or below 142.50. Interesting to see where the EURCHF status is post-SNB tomorrow.
Silver remains unsettled as volatility and cross-market risks collide
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