Dollar Firms Up

July 02, 2024

Dollar Firms Up

  • Financial markets are positioning for a Trump win ahead of the November 5 election. Powell speaks today on a panel with Lagarde.
  • ECB officials continue to signal a cautious policy easing approach. Eurozone June CPI is up next.
  • RBA June meeting minutes offered more details behind the bank’s hawkish hold.

USD is firmer across the board and the US yield curve (10 minus 2-year Treasury yields) steepened. The narrative is financial markets are positioning for a Trump win ahead of the November 5 election. Donald Trump plans to slash taxes and raise import tariffs if elected. This combination is inflationary and could force the Fed to keep policy restrictive for longer. A loose fiscal/tight monetary policy mix is generally positive for a currency and supports higher bond yields. Additionally, expansionary fiscal policy if not accompanied by stronger growth could worsen the US fiscal backdrop and raise the term premium on longer term Treasury yields.

We remain cyclically bullish on USD, but in the near-term softer US economic activity is a USD headwind. Yesterday, the US ISM manufacturing index unexpectedly fell in June to 48.5 (consensus: 49.1) from 48.7 in May. The details showed demand remains subdued and prices increases cooled. As a result, the Atlanta Fed's GDPNow model is now tracking annualized Q2 growth of 1.7%, down from 2.2% last week.

Today, the May US JOLTS job openings data is expected to show labor demand is cooling (3:00pm London). The number of job openings relative to unemployed workers is down to near its pre-pandemic level. Moreover, the job opening rate (job openings as a percentage of total employment plus job openings) fell in April to 4.8%, the lowest level since December 2020 and nearing the 4.5% threshold consistent with a significant increase in the unemployment rate.

Fed Chair Jay Powell speaks on a panel with ECB President Christine Lagarde (2:30pm London).

GBP/USD is down near key technical support at 1.2600. UK BRC shop prices fell 0.2% m/m in June on lower food and non-food items. On an annual basis, shop price inflation slowed more than expected to a 32-month low of 0.2% (consensus: 0.5%) from 0.6% in May. Bottom line: the UK disinflationary trajectory supports the case for a Bank of England (BOE) rate cut in August which can further undermine GBP. The swaps market sees 60% odds of an August 1 BOE rate cut.

EUR/USD pared back most of yesterday’s gains. ECB officials continue to signal a cautious policy easing approach. Yesterday, President Christine Lagarde warned “it will take time for us to gather sufficient data to be certain that the risks of above-target inflation have passed…The strong labour market means that we can take time to gather new information.” Also, Governing Council members Wunsch and Simkus suggested the ECB is unlikely to slash the policy rate more than 50 bp between July and December. The swaps market sees 80% odds of 50 bp of ECB rate cuts by year-end.

EUR will be guided today by the Eurozone June preliminary CPI data (10:00am London). In June, annual headline and core CPI inflation are forecast to fall a tick to 2.5% and 2.8%, respectively. Risks are balanced because the EU Harmonized inflation prints for Germany, France, Spain, and Italy matched consensus. Overall, the Eurozone disinflationary process is well on track and supports the case for the ECB to cut rates again in September which is a drag for EUR. The swaps market implies 68% odds of a 25 bp ECB rate cut for September 12.

AUD/USD is trading on the defensive near the middle of its multi-week 0.6575-0.6700 range on broad USD strength. The RBA June meeting minutes offered more details behind the bank’s hawkish hold. A major reason RBA members thought the case to leave the policy rate unchanged was stronger than a hike was because of the “uncertainty around the data for consumption and clear evidence that many households were experiencing financial stress.” As such, tomorrow’s Australia May retail sales print will either strengthen or weaken the case for an RBA policy rate hike. The swaps market is pricing 25% odds of a 25 bp RBA policy rate increase at the next August 6 meeting.

NZD/USD edged lower under its 200-day moving average (0.6071). The NZIER Survey of Business Opinion (QSBO) declined in Q2 and points to a continued slowing in the New Zealand economy over the coming year. A net 35% of firms expect a deterioration in the general economic outlook over the coming months on a seasonally adjusted basis vs. 25% in Q1. This reinforces the case for the RBNZ to start easing earlier than they project which can further weigh on NZD. The RBNZ has a first policy rate cut penciled-in for Q3 2025. In contrast, the swaps market has a November cut more than fully priced in.

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