The DXY Index rose 0.2% to 105.63 overnight but stayed in the 105.10-105.90 range set after the FOMC meeting on June 12. The same trading behaviour was also evident in the US Treasury 10Y yield, which firmed 1.6 bps to 4.25%, inside a 4.20-4.30% range for the comparable period. Per the futures market, the probability for a Fed cut in September flatlined into a very tight 60-65% range in the past week due to mixed signals from Fed officials and US data. For example, Fed Governor Michelle Bowman favoured keeping interest rates unchanged in 2024, ready to raise them if the progress on inflation stalls. Conversely, Fed Governor Lisa Cook believed it was fitting to lower rates but saw a bumpy fall in monthly inflation over the rest of 2024. Hence, all eyes will be on Friday’s US PCE deflator, which is expected to mirror the fall in CPI inflation a fortnight ago. Additionally, the Fed’s recent concern over the US unemployment rate rising to 4% in May has not gone unnoticed, placing tomorrow’s initial jobless rate and next Friday’s monthly jobs report high on the agenda.
The components in the DXY basket are also range-bound amid uncertainties over monetary policy and the elections in France and the UK.
EUR/USD is in a 1.0660-1.0760 range, awaiting the first round of France’s snap election on June 30. Assuming none of the parties win an outright majority, a second round will be held on July 7. The polls suggest President Emmanuel Macron’s party will not secure an outright or relative majority. The far-right National Rally leader, Jordan Bardella, said he would not become Prime Minister without an outright majority. Hence, France is looking at a “cohabitation” with Bardella as Prime Minister and Macron as President or political paralysis because new elections cannot be called for another year. The European Central Bank will probably play down EU break-up risks at its Forum on Central Banking in Sintra next week. The ECB and the other global central banks will probably be closely aligned in their plans to navigate a data-dependent path toward removing top-level restrictions on rates for the rest of this year.
GBP/USD has been holding a lower 1.2620-1.2700 range over the past week. Although the UK’s CPI inflation hit the 2% target in May, it was not enough for the Bank of England to lower rates on June 20 or for Prime Minister Rishi Sunak’s Conservative Party to avert the worst outcome at the elections on July 4. However, the OIS market has assigned a 60% probability for a rate cut in September, around the same odds that the futures market has for a Fed cut in the same month.
USD/JPY rose from 155 to 160 In June but settled in a 159-160 range this week. Although the Bank of Japan signalled plans to raise rates and reduce JGB purchases, it delayed the details to the July meeting. The US Treasury Department (USTD) placed Japan on the monitoring list for currency manipulation, a decision it said was not attributed to Japan’s interventions in April-May to prop up the JPY but for meeting two of the three mechanical criteria. Japan’s policymakers said the USTD’s decision had “absolutely no impact” on its resolve to address the excessive currency speculation. Japan’s officials clarified that the interventions were aimed at protecting households and corporates from further yen depreciation, and not aimed at weakening the exchange rate to gain an unfair advantage in international trade.
Quote of the day
“If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”
Milton Friedman
26 June in history
The United Nations Charter was signed by 50 nations in 1945.
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