Dollar weakness is picking up as Trump continues to criticize the Fed. DXY traded at a new cycle low near 96.377 earlier before rebounding to trade near 96.441 currently. President Trump is stepping up his pressure campaign on the Fed and while we do not think Powell will change his stance, easing expectations have picked up on the notion that his successor will be more dovish (see below). The euro is trading higher near $1.1810 after making a new cycle high earlier near $1.1830, while sterling is trading higher near $1.3780 after making a new cycle high earlier near $1.3790. Further gains are likely for both (see below). Elsewhere, the yen is outperforming again after a solid Q2 Tankan report (see below), with USD/JPY trading lower near 142.90. While the dollar could see a modest haven bid from time to time given simmering Middle East tensions, we believe the fundamental dollar downtrend remains intact. With recent US data coming in soft, we expect markets to start pushing back harder against the Fed’s hawkish hold. Trump jawboning the Fed won’t help matters as Fed independence remains a concern. Market repricing of Fed easing along with fading risk off impulses should keep the dollar under pressure.
AMERICAS
President Trump’s criticism of Powell is intensifying. Yesterday, Trump sent Powell a handwritten note calling for lower rates and suggesting that the Fed Funds rate should be cut to 1% “or better.” He also spread the blame to the Board of Governors, which is something new. Treasury Secretary Bessent piled on, noting that Fed policymakers “seem a little frozen at the wheel.” Yes, most Fed officials appear to be ruling out a July cut. Barring a total collapse in the economy, we concur. Odds of a July cut are around 20% while a cut is fully priced in for September. Looking ahead, the swaps market is now pricing in 100 bp of total easing over the next 12 months, with nearly 70% odds of a fifth 25 bp cut. We do not think Powell will change his stance, and so this Fed repricing likely reflects expectations that Powell’s replacement will be much more dovish.
No wonder dollar weakness is picking up. DXY traded today at the lowest since March 2022 near 96.377. The near-term target is the January 2022 low near 94.629 but the longer-term target is the January 2021 low near 89.209. The euro traded today at the highest since September 2021 near $1.1830. the near-term target is that month’s high near $1.1910 but the longer-term target is the January 2021 high near $1.2350. Sterling traded today at the highest since October 2021 near $1.3790. The near-term target is the July 2021 high near $1.3985 but the longer-term target is the June 2021 high near $1.4250. USD/JPY traded near 142.80 today but remains within the recent 140-145 range. We target the April low near 139.90.
Fed Chair Powell takes part in a central banking panel today. ECB President Lagarde, BOE Governor Bailey, BOJ Governor Ueda, and BOK Governor Rhee will all be on that panel at the ECB conference in Sintra. We do not expect him to deviate from his cautious stance.
June ISM manufacturing PMI will be important. Headline is expected to pick up three ticks to 48.8. Keep an eye on prices paid, which is expected to rise a tick to 69.5. Employment and new orders are both expected to improve modestly to 47.1 and 48.1, respectively. The regional Fed ISM manufacturing prints suggest risks are skewed to the upside. Of note, the US S&P Global manufacturing PMI was unchanged in June at 52.0, a four-month high. Chicago PMI was reported yesterday at 40.4 vs. 43.0 expected and 40.5 in May. However, this series has not correlated with the national PMI readings in years and so offers little insight to today’s ISM.
May JOLTS data will also be reported. Job openings are expected at 7.300k vs. 7391k in April. In April, the JOLTS data was consistent with a labor market roughly in balance as the unemployment-to-job opening ratio remained at 1 for a second consecutive month. Meanwhile, the layoffs and hiring rates both rose 0.1 ppt to 1.1% and 3.5%, respectively.
The growth outlook is deteriorating. The Atlanta Fed GDPNow model now estimates Q2 growth at 2.9% SAAR vs. 3.4% previously. It will be updated today after the data. Elsewhere, the New York Fed Nowcast model now estimates Q2 growth at 1.7% SAAR vs. 1.9% the previous week and Q3 at 1.9% SAAR vs. 2.1% the previous week. All these latest readings aren't bad but are clearly decelerating after weeks of strength. They will be updated Friday.
EUROPE/MIDDLE EAST/AFRICA
European Central Bank officials are voicing some concern about the strong euro. Vice President Guindos said “I think that $1.17, even $1.20, is not something. We can overlook it a little bit. Something beyond that would be much more complicated. But $1.20 is perfectly acceptable.” At this point, we believe Guindos is in the minority. President Lagarde herself has embraced the strong euro as a generational moment of change and so for now, it’s full speed ahead for the euro.
Eurozone reported June CPI data. Headline CPI inflation picked up a tick as expected to 2.0% y/y while core CPI inflation remained steady as expected at 2.3% y/y. Both remain close to the 2% target. However, services inflation picked up a tick to 3.3% y/y and still has some distance to travel to make sure that inflation stabilizes at the target on a sustainable basis. Bottom line: the ECB is nearly done easing. The swaps market implies one 25 bp rate cut over the next 12 months that would see the policy rate bottom at 1.75%. Guindos, Elderson, Schnabel, and Lagarde speak today.
ECB May inflation expectations cooled. 1-year expectations fell three ticks to 2.8% vs. 3.1% expected, while 3-year expectations fell a tick to 2.4%. 1-year expectations had been rising steadily since February and so the drop in May will be welcome news for the ECB. 3-year expectations have been better behaved but the drop here will also be welcomed by the ECB.
UK Prime Minister Starmer faces constraints in steering his Labour government towards the center. Last week, Starmer was forced to soften planned cuts to welfare after more than 120 Labour MPs threatened to vote against his welfare reforms today. Starmer’s U-turn will derail his government’s plan to balance the budget by 2029-30. The implication is that Chancellor Reeves may need raise taxes again in the 2025 Autumn Budget due in October. Higher UK taxes, combined with weak underlying GDP growth and emerging labor market slack, could force the BOE to cut the policy rate more aggressively than anticipated. The swaps market implies a total of 75 bp of total easing over the next 12 months. In contrast, the ECB’s rate-cutting phase is close to wrapping up. As such, EUR/GBP has room to edge higher towards 0.8800.
ASIA
Japan Q2 Tankan report was solid. Large manufacturing business conditions index came in at 13 vs. 10 expected and 12 in Q1, while large manufacturing outlook came in at 12 vs. 9 expected and 12 in Q1. Elsewhere, large non-manufacturing business conditions index came in as expected at 34 vs. 35 in Q1, while large non-manufacturing outlook came in at 27 vs. 29 expected and 28 in Q1. Finally, all industry capex came in at 11.5% vs. 10.0% expected and 3.1% in Q1. However, the outlook for Q3 shows caution. Large manufacturers forecast a drop in business to 12, while large non-manufacturers expect a sharper slowdown to 27. Lastly, long-term inflation expectations for all enterprises stabilized. Businesses see headline CPI inflation at a series high of 2.4% and 2.3% in three and five years’ time, respectively. This is unchanged from the previous quarter.
We expect the Bank of Japan to remain very cautious. Indeed, new board member Kazuyuki Masu said “Given recent economic situations, we can’t say now’s the time to speed up. I have no disagreements with what the governor has said. We have to consider carefully.” With regards to his policy stance, he stressed that “I’m a complete blank slate. Please put me right in the middle if you need to make a map.” The swaps market continues to price in only 25 bp of total tightening over the next 12 months. Governor Ueda speaks later today at the ECB conference in Sintra.
Caixin reported a firm manufacturing PMI for June. Headline came in at 50.4 vs. 49.3 expected and 48.3 in May. This completely reversed the May drop. Services and composite PMIs will be reported Thursday, with services expected to fall two ticks to 50.9. We believe China’s economic recovery remains fragile, and we expect more stimulus measures in the second half of the year.
