The DXY Index ended the first day of July at 105.82, slightly below Friday’s 105.87. Its most significant component, the EUR, initially spiked and met resistance at 1.0776 (50-day moving average) on the far-right National Rally party failing to secure an outright majority at the first round of the French elections on Sunday. EUR/USD ended Monday at 1.0740, back inside the 1.0650-1.0750 range seen in the second half of June. Similarly, DXY has been consolidating in a 105.3-106.2 range since June 21. While the EUR fears the second round of the French elections (on July 7) will produce a far-right government or a hung parliament, the USD is wary of a weaker US monthly jobs report (on July 5) opening the door increasing the market’s bet for the Fed to lower rates in September. GBP/USD has been within 1.26-1.27 over the past week amid more clarity about the UK elections on July 4, producing a majority government led by the opposition Labour Party.
At its forum in Sintra, the European Central Bank signalled no intentions for a second interest rate cut at its July 18 meeting. ECB President Christine Lagarde wants more time to assess the inflation uncertainties. Although consensus expects CPI inflation to decline to 2.5% YoY in June, it remains in a 2.4-2.6% range since February. Likewise, the anticipated decline in core inflation to 2.8% falls within the 2.7-2.9% range in the previous 3 months. Today, consensus expects the unemployment rate to hold at its lifetime low of 6.4% for a second month in May, following Eurozone economy’s exit from a technical recession in 1Q24.
Today, Fed Chair Jerome Powell may sound less hawkish during his panel discussion with Lagarde and Brazilian central bank governor Roberto Campos Neto in Sintra. Powell will likely be hopeful about US inflation declining in 2H24. He is monitoring the US unemployment rate, which rose in May to the 4% level the Fed projected for 4Q24 in last month’s Summary of Economic Projections. Today, consensus expects JOLTS job openings to decline a third month to 7950k in May, below the 8000 level for the first time since February 2021. Yesterday’s US ISM manufacturing survey showed the prices paid index falling a second month to 52.1 from 57.0 and the employment index declining to 49.3 from 51.1. The Atlanta Fed GDPNow model predicts a soft landing for the US economy; GDP growth to stay low at an annualized 1.7% QoQ saar in 2Q24 from 1.4% in 1Q24.
USD/JPY extended its rise above 160 to 161.46 from another increase in US bond yields and a lack of haven appeal after the first round of French elections. The better-than-expected Tankan Survey in June should keep hopes alive for a second interest rate hike and provide more details on the plan to reduce JGB purchases at the upcoming Bank of Japan meeting on July 30-31. Corporates expect inflation to hold above 2% over the longer term, i.e., 2.3% over the next three years and 2.2% five years ahead. Despite the Japanese economy contracting by 0.7% QoQ sa in 1Q24, large corporates planned to increase capital expenditure by 11.1% in the current fiscal year ending March 2025. The outlook for the manufacturing sector increased to 14, its strongest since September 2021, while that for the non-manufacturing sector stayed firm at 27 for the third quarter. Interestingly, Japanese businesses predicted that USD/JPY would decline to 144.59 for the fiscal year ending March 2025.
Quote of the day
“Every time I thought I was being rejected from something good, I was actually being re-directed to something better.”
Steve Maraboli
2 July in history
In 1916, Lenin said that imperialism was caused by capitalism.
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