Fade to Dove

US

Crude oil prices and USD rallied yesterday as the US potentially wades into the Israel-Iran fight. President Donald Trump called for “unconditional surrender” from Iran. Financial market risk-on tone has re-emerged today. Crude oil prices and USD pared back some of yesterday’s gains while equity markets firmed up.

Escalating military tensions in the Middle East can further lend USD a safe-haven bid and weigh on risk assets. However, we would look to fade USD strength in part because we expect the Fed to deliver a dovish hold today (7:00pm London).

The FOMC is widely expected to vote unanimously in favor of keeping the target range for the Fed funds rate steady at 4.25-4.50%. The market sees only 15% odds of July cut, rising to 75% in September and fully priced in for October.

The risk is the FOMC delivers a dovish hold because inflation pressures remain contained. Headline PCE is tracking 0.6pts below the FOMC 2025 projection of 2.7% while core PCE is tracking 0.3pts below the FOMC 2025 projection of 2.8%. Of note, the unemployment rate is tracking 0.2pts below the FOMC 2025 projection of 4.4%.

As such, we expect the press release to soften its previous assessment “that the risks of higher unemployment and higher inflation have risen.” Fed Chair Jay Powell could also drop some hints that the Fed is feeling more confident that it can cut rates sooner rather than later.

The updated FOMC Dot Plots will be important. The median Dots should remain unchanged and imply 50bps of cuts in 2025, in line with the pricing from Fed funds futures. However, we see some risks of a hawkish shift in the Dot Plots, as it would take only two officials to move from two cuts to one to get a similar move in the 2025 Dot.

The US economy is holding up well. As of June 17, the Atlanta Fed GDPNow model estimates Q2 growth at 3.5% SAAR, down from 3.8% on June 9. The primary driver to Q2 growth remains net exports (+2.07pts), which is not indicative of solid economic activity as it largely reflects a tariff-related plunge in imports. A fresh update of the Atlanta Fed GDPNow model will be published today after the May housing starts data (1:30pm London).

US retail sales slide in May but the details remain consistent with healthy consumer spending activity. Headline retail sales fell more than expected by -0.9% m/m (consensus: -0.6%) vs. -0.1% in April (revised down from 0.1%). The decline was driven by a -3.5% m/m plunge in motor vehicle sales, reflecting the fading impact of pre-tariff stockpiling of car purchases. Importantly, the control group - used for GDP calculations - increased 0.4% m/m in May (consensus: 0.3%) vs. -0.1% in April (revised up from -0.2%) supported by gains in sporting goods, furniture and apparel.

Today’s weekly jobless claims will be of interest (1:30pm London). That’s because initial claims are for the BLS survey week containing the 12th of the month, and are expected at 245k vs. 248k last week, the highest since October 2024.

The US April TIC flows will offer important insights (9:00pm London). In March, the data showed foreigner investors continued to pile-into US securities. The April print is expected to highlight dwindling appetite for US securities given the unusual synchronized decline in the dollar, US stocks and Treasuries that month.

Interestingly, the Bank of America June global fund manager survey shows a shift away from US assets and strong bearish sentiment toward the US dollar. In June, a net 34% say they are overweight European equities relative to their benchmark (close to a four-year high), a net 28% are overweigh emerging market equites (the highest allocation since August 2023), while a net 36% say they are underweight US equities (close to a two-year high).

Meanwhile, a net 31% of investors reported being underweight the US dollar, the most negative reading in 20 years. This should not be seen as an opportunity to take a contrarian stance as the survey also shows 61% of investors consider the dollar to be overvalued in June, compared to 57% in May.

UK

GBP ticked-up slightly following the mixed UK May CPI data. Headline CPI slowed less than expected in May but matched the BOE’s forecast at 3.4% y/y (consensus: 3.3%) vs. 3.5% in April. Core CPI eased in line with consensus to 3.5% y/y vs. 3.8% in April. Services CPI fell more than anticipated but matched the BOE’s forecast at 4.7% y/y (consensus: 4.8%) vs. 5.4% in April.

The UK inflation backdrop argues for the BOE to pause easing tomorrow and keep rates steady at 4.25%. Indeed, the swaps market price-in just 4% odds of a rate cut. Further out, the swaps market implies a total of nearly 75bps of cuts in the next 12 months.

Nonetheless, a dovish surprise tomorrow cannot be ruled out which can undermine GBP. UK private sector regular pay growth slowed more than anticipated in April and points to further easing in services inflation. Moreover, UK real GDP shrank more than expected in April, driven by a sharp drop in the critical services sector.

Attention will be on the MPC vote split. At the last May 8 meeting, the MPC voted by a 5-4 majority to trim the policy rate by 25bps to 4.25%. Two members preferred to reduce the Bank Rate by 50bps (Taylor and Dhingra) and two members preferred to keep rates unchanged (Mann and Pill).

Taylor and Dhingra should back a 25bps cut in June while Mann and Pill will likely vote again to stand pat. This leaves 3 swing votes to decide the policy outcome. Interestingly, BOE Governor Andrew Bailey said after the May 8 meeting “every meeting is live for us” adding that he's “very open minded” about a June rate cut.

SWEDEN

USD/SEK consolidating near key support at 9.5000. The Riksbank is expected to cut the policy rate 25bps to 2.00% (8:30am London). The swaps market is pricing in 82% probability of a cut.

At the last May 8 meeting, the Riksbank kept rates steady at 2.25% but warned that additional easing may be in the pipeline because “it is somewhat more probable that inflation will be lower than that it will be higher than in the March forecast.” In fact, CPIF ex-energy fell two ticks more than the Riksbank projected in May to 2.5% y/y vs. 3.1% in April. The June Monetary Policy Report will offer a fresh batch of macroeconomic forecasts.

CANADA

USD/CAD recovered towards 1.3700 after testing an 8-month low near 1.3540 on Monday. The Bank of Canada’s (BOC) account of its June 4 meeting confirmed that two policy options were discussed: maintaining the policy interest rate at 2.75% or reducing it by 25bps. Ultimately, the Governing Council decided to keep the policy interest rate at 2.75% because the Canadian economy was softer but not sharply weaker and there was some unexpected firmness in recent inflation data.

Governing Council members also agreed there could be a need for a further reduction in the policy interest rate if the effects of US tariffs and uncertainty continued to spread through the economy and cost pressures on inflation were contained. The next BOC meeting is July 30, alongside the release of its quarterly Monetary Policy Report. The swaps market is pricing in 26% probability of a 25bps cut in July and a total of 25bps of easing over the next 12 months and the policy rate to bottom at 2.50%. Governor Tiff Macklem speaks today (4:15pm London).

BRAZIL

Brazil’s central bank is expected to keep rates at 14.75% (10:30pm London). However, the market is split. Nearly half the analysts polled by Bloomberg look for a 25bps hike, while the CDI market sees about 50-50 odds of a hike.

At the last meeting May 7, the central bank hiked rates 50bps to 14.75% and noted that the easing cycle is in an “advanced stage” and that calibration of monetary policy depends on how inflation behaves. The bank warned that risks to the inflation outlook in both directions are higher than usual. As such, “This scenario prescribes a significantly contractionary monetary policy for a prolonged period to assure the convergence of inflation to the target.”

CHILE

Chile’s central bank delivered on expectations yesterday and kept rates unchanged at 5.00%. The decision was unanimous, and the statement left the door open for additional rate cuts. The bank noted that if the central scenario of the June Monetary Policy Report (published today) materializes, the policy rate will be approaching its range of neutral value in the following quarters. The bank’s estimate of the neutral rate range is between 3.50% and 4.50%. The swaps market is pricing in 75bps of easing over the next 12 months that would see the policy rate bottom near 4.25%.