After taking heavy losses following the release of US CPI yesterday, the United States Dollar clawed back a bit of ground in afternoon trading and through this morning.
Overview
The only semi-surprise from the Federal Reserve yesterday afternoon came from voting members’ updated dot plot, showing Fed officials only expect to cut interest rates once this calendar year. This was offset, however, by the addition of another 25 basis point cut in 2025, bringing the total amount of easing somewhat in line with market expectations in the longer term. In the short term, however, traders appear to be unconvinced that the Fed will actually only execute one cut this year, and overnight swaps still lean more toward pricing in two interest rate cuts this year. The big question for monetary policy through the back half of this year is when that first (or only) interest rate cut will come – oddsmakers are fairly evenly split between the Fed’s September and December meeting for such action to be taken.
Fed Chair Jerome Powell, for his part, struck a slightly more hawkish tone than many expected, giving USD a small bit of a recovery through the afternoon session. During his press conference, he reiterated that the central bank will continue to be data-dependent, and while he did not close the door on more than one cut this year, he did push back on market speculation that the Fed is complacent with current levels of inflation. The Dollar did get a bit of a boost during his press conference, recovering a small amount of the morning’s losses. Nonetheless, yesterday was still the worst day for USD in more than a month, and today, the Buck finds itself firmly in recovery mode. This morning’s Producer Price Index did little to help support USD, coming in lower than all market expectations and actually contracting month-over-month. This is further fuel to the differential between market expectations and the Fed’s own dot plot, but the central bank will undoubtedly be looking for more continued evidence that inflation is in fact slowing.
Treasury Secretary Janet Yellen and New York Fed President John Williams are due to speak later today, and markets will be looking for further clues from Williams on how yesterday morning’s cool CPI reading factored into the Fed’s decision yesterday. Preliminary consumer sentiment for the month of June from the University of Michigan is also due out tomorrow morning.
What to Watch Today…
- S&P Global Composite Flash PMI, Friday
- Monex USA Online is always open.
EUR ⇓
The single currency, perhaps the largest benefactor of yesterday’s CPI undershoot from the US, has retraced a bit of ground this morning as the market digested the messaging from Jerome Powell and the Federal Reserve in the afternoon. European Central Bank officials have attempted to signal that they will not be as willing to cut interest rates further than the 25 basis point reduction the ECB enacted last week without consistent data showing normalized inflation, but the Fed’s updated dot plot added a bit of additional pressure on them. Political concerns through the continent continue to drive pricing as well and could well put a ceiling on EUR gains until after the French elections in a few weeks’ time.
JPY ⇓
After reaping the benefits of cool US inflation during the morning session yesterday, JPY’s fortunes reversed through the afternoon and into today and the beleaguered currency is trading a quarter of a percent weaker on the day. The yawning interest rate differential between Japan and the United States continues to be a primary driver of USDJPY pricing, and the Fed’s updated dot plot showing just one interest rate cut this year did nothing to help give JPY support, prompting a bigger move in USDJPY during Powell’s press conference than in any other major pair.
