04 June 2019: Dollar falls as rate cut expectations grow

04 June 2019: Dollar falls as rate cut expectations grow

Dollar falls as rate cut expectations grow

June 4th: Highlights

  • FOMC Member says “rate cut may be warranted soon”
  • Brexit’s “consumer cushion” starting to fail
  • Euro main beneficiary of dollar’s fall

U.S. economy slowing, Q2 GDP below 3%

FOMC member James Bullard, the President of the St. Louis Federal Reserve, said in a speech yesterday that a rate cut “may be warranted soon” leading to speculation that the economy may be slowing significantly.

Despite Jerome Powell’s assertion that the Fed sees the same data as the markets, Bullards comments led to speculation that this Friday’s employment report may contain a downwards shock.

The rising risks to the global economy and weak inflation were cited as the main reasons that a cut may be warranted as the market speculates on Q2 GDP data.

Manufacturing output was lower than the market had expected at 52.10 falling from 52.80 in May and a market expectation of a rise to 53.00.

Despite these concerns, new vehicle sales were higher than expected, posting their first MoM increase of 2019.

There is little doubt that there has been something of a fall in expectations for the U.S. economy fed by the “slow-drip” of poor data and worrying comment. Consensus remains at +190k for May’s headline employment figure but risks are now significantly skewed to the downside.

President Trump, enjoying a State visit to the UK where he attended a banquet hosted by the Queen, continued to promise a “bumper” trade deal once the UK is “ free of the shackles of the EU”. He continued his “Twitter spat” with the Mayor of London suggesting that he improved his performance before commenting on the leader of the UK’s greatest ally.

The dollar index fell to a low of 97.11,closing at 97.24.

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U.K. consumers keep wallets closed

One of the features of the “Brexit fiasco” has been the willingness of the British consumer to “carry on spending.” Buoyed by wage inflation that has easily outstripped price rises, the public has barely changed their shopping habits.

However, that may all be changing as the spectre of a no deal departure becomes more real. It is not the outcome of a no deal scenario that scares the public more the uncertainty that it brings.

Yesterday, the British Retail Consortium produced its independent data on consumer spending. Like for like spending fell by 3% in May, having grown by 3.7% in April. The market expectation was for a small rise, close to 1%. Should this be a precursor of weaker economic data, the Bank of England will be shaken out of its recent relaxed attitude and could be forced to act.

The pound rose against a weaker dollar yesterday, reaching 1.2675 and closing at 1.2665. Versus the single currency, it remains weak, reaching a low yesterday of 1.1247 as the euro starts to find support.

Following President Trump’s departure on Thursday, Mrs May will formally depart as leader of the Conservative Party and Prime Minister and the removal vans will arrive in Downing Street.

Number 10 will remain empty for a few weeks although there is newspaper talk this morning that there may be a cull of candidates for the Leadership who are seen as having no chance of winning.

Euro rally “worst of both worlds”

The increase in the value of the single currency versus both the dollar and pound yesterday was not necessarily what Mario Draghi will have wanted to see. This week he will be holding a press conference following a monetary policy meeting of the ECB.

While Draghi won’t be able to admit it in public, a rise in the value of the currency that is not related to better performance of the Eurozone economy is a blow to his hopes of a recovery in the short term. Exports become more expensive while domestic activity continues to slow. Inflation, which is considered benign at best, receives another downwards jolt and competitiveness in global markets is affected.

Today’s release of Eurozone-wide consumer prices is expected to see a YoY fall to 0.9% from 1.3% in April. This is despite Sr. Draghi’s continued affirmation that it is about to turn around.

GDP data which will be released on Thursday will, thankfully, show that the region continues to grow albeit at a “snail’s pace”.

It will be Q2 data for individual nations, in particular, the “big three” of Germany, France and Italy, that will be the most eagerly awaited. The first cuts will be released either later this month or early next.

The euro rose to a high of 1.1264, closing 1.1241. Traders were aware of not getting too carried away with long positions and the market remains “net-short.”

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”