Dollar Beaten Across the Board – What Happens Now?

Market Drivers June 20, 2019
USDJPY tests year lows
US 10Y hits 2.00%
Nikkei 0.60% Dax 0.99%
UST 10Y 2.00%
Oil $55/bbl
Gold $1379/oz.
10Y 2.00%

Europe and Asia:
GBP UK Retail Sales -0.5% vs. -0.5%

North America:
CAD ADP 8:30
USD Philly Fed 8:30

The dollar was destroyed across the board in Asian and early European trading today after the Fed signaled that it will cut rates at its next meeting in July.

US 10 year yields hit a low of 2% causing USDJPY to probe its swing lows at 107.50 while EURUSD climbed above the 1.1300 figure despite threats by ECB just a few days ago to lower rates deeper into negative territory.

The dollar drop was really a story of relative weakness as the markets reacted to the possible adjustment of lower US rates. Some bears have even argued that to have any effect the Fed needs to cut rates by 50 basis points rather than 25 at the meeting next month.

Yet despite the widespread assumption that the Fed has turned dovish, there remains a clear sense of reluctance on the part of Fed officials to lower rates dramatically at a time of economic expansion leaving policymakers with few tools should economic conditions deteriorate rapidly. That’s why going forward it will be particularly important to pay attention to economic data over the next month, most specifically business sentiment and production surveys which Chairman Powell noted was the weak spot in the US economy.

If Fed’s jawboning results in easing of credit conditions, improvement in business sentiment and a pick up in investment then the FOMC is much more likely to opt for one and done approach in July. Of course, a big factor in market conditions lies outside of Fed’s control as trade relations with China will drive business decisions far more than any tweaks in the Fed funds rate. To that end the G-20 meeting between Trump and Xi looms large with sentiment possibly swinging the other way should the meeting prove productive resulting in some long term rapprochement between the US and China.

On the other hand, should the negotiations fail or simply produce no meaningful progress, the disappointment is likely to trigger a capitulation by dollar bulls and a move to fresh yearly lows in USDJPY.