USD: All eyes on the Fed response now – ING

Global risk assets continue to correct sharply as investors fear that the Federal Reserve (Fed) has left it too late to ease policy. This follows Friday's soft US jobs data and the now widely cited Sahm rule that points towards a US recession. That data provided a watershed moment for US rates markets, where short-dated US yields collapsed on the view that the Fed would have to slash rates heavily this year. The market now prices around 120bp of Fed rate cuts before year-end, ING’s FX strategist Chris Turner notes.

Fed to shed light on the recession problem

“The fear of a recession in the US is now bringing in the idea of stimulative monetary policy. This has seen the USD 1 month OIS rate priced two years forward priced sub 3.0%. Recall that 3% was seen as the floor for the Fed's terminal rate when US rates fell sharply late last year. Views of where the Fed easing cycle ends have now become unanchored.”

“Where to from here? Presumably the Fed will have to offer some soothing words. Look out for a CNBC appearance today from Chicago Fed President Austan Goolsbee at 1430CET. But at the same time, the evidence against the Fed could build were the July ISM services index (16CET) not to rebound as expected. We think the marked correction in equities is keeping high beta currencies under pressure.”

“However, when asset markets stabilise, which they eventually will, we would then expect the dollar to come lower across the board given that the dollar yield advantage has been sharply pared. For the time being, however, expect the focus to remain on the likes of USD/JPY and USD/CHF - both of which could drop further. DXY looks biased to 102.00.”