Dollar routed as markets brace for Federal Reserve cuts

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10 June 2019


Fears over escalating trade tension, disappointing economic data from the US and non-committal communications from Fed Chair Powell gave the market free rein to price in increasingly aggressive rate cuts from the Federal Reserve over the next few quarters.

ot surprisingly, the Dollar experienced its worst week in months, falling more than 1% against every single G10 currency except the Yen. In a sign that markets are still relatively comfortable with prospects for worldwide growth, emerging market currencies performed well, with the exception of the South African Rand which was by far the worst-performing major currency worldwide after poor first quarter GDP growth numbers.

Now that the stand off over Mexican tariffs at least appears to be solved, markets will scrutinize US economic data for signs of weakness that will validate rate cut expectations. Inflation numbers on Wednesday and retail sales on Thursday should drive Dollar performance next week.


The only data of note out of the UK last week was a marked softening of manufacturing sentiment, in line which what we are saying across advanced economies. However, for now, Sterling is staying out of the spotlight, closely tracking Euro moves against the US Dollar. Labor data out this Tuesday is important, but in the absence of political developments around Brexit we expect the recent trend where the Pound largely moves with the Euro against world currencies to continue.


The ECB announced minor tweaks to its monetary policy, most importantly a fairly generous offer of funds to Eurozone banks, but otherwise stayed on script and did not greatly surprise markets. Economic data continue to be mixed, with poor German industrial production numbers contrasting with still strong job creation numbers. With no key policy announcements on tap for next week, the Euro should trade in response to moves in Federal Reserve rate expectations resulting from Fed communications and US economic data.


Fed doves were doubtlessly emboldened last week by the weak payroll report for the month of May. Job creation came down strongly, to just 75,000, and the previous month numbers were revised by 75,000. Wage growth is still healthy but it shows no sign of rising. While we would discourage jumping to conclusions from a single bad print, the markets had no such qualm and US Government bonds rallied along with expectations for cuts in the overnight rate, as the Dollar sold off sharply.


In a week with little relevant macroeconomic or policy news, the Zloty rallied strongly against the Euro and consequently against the Dollar. Central European currencies all rallied together, as the dovish ECB conference lures investors into the relative attractiveness of returns still available across the region. We would expect the rally to continue as investment flows will have no reason to reverse, until at least Friday, when the key inflation report comes out that will set the tone for the next meeting of the NBP.