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Dollar rallies hard as US job reports undermines case for Federal Reserve cuts
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8 July 2019
Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.
We’ve been harping for a while that interest rate markets were getting ahead of themselves, pricing in almost four full cuts from the Federal Reserve over the next few quarters.
It is notable that the Dollar’s performance was much more mixed against major emerging market currencies, many of which managed to put in yet another strong performance instead of higher US yields, as fears over the world economy recede.
The focus for this week remains entirely on the US. Federal Reserve Chair Powell will testify in front of Congress. It will be interesting to see the extent to which recent strong economic numbers dampen his enthusiasm for looser policy.
GBP
There are increasing signs that the uncertainty over the Brexit standoff is starting to impact UK business confidence. The PMI indicators of business activity dropped below the key 50 level that indicates contraction.
This week we will see whether this loss of confidence is reflected in actual economic data when GDP growth for the three months to May is released on Wednesday.
EUR
The announcement that Christine Lagarde would be the next ECB President sends a message of continuity and, perhaps, dovishness at the margin. Markets certainly saw it this way, as Italian bonds rallied strongly and the Euro started losing altitude even before the US payroll report on Friday.
Also, the EU decision not to pursue penalties against Italy over its budget deficit signals a more tolerant view of additional fiscal stimulus. This means that, in our view, additional monetary easing may be less necessary, which should be positive for the Euro over the medium term.
USD
Last week’s positive noises in the trade front were capped on Friday by a very strong payrolls report out of the US. Job creation rebounded strongly in June from its May dip, real wages continue to grow modestly but steadily. There is no sign that a recession or even a significant slowdown is on the cards in the US.
After the report, markets seemed to rule out any chance of a 50 bp cut in the Federal Reserve July meeting. While we think that one cut is politically inevitable, we do not see the conditions in place for a sustained easing cycle.
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