USD: Markets are fixated on policy makers - ING

Analysts at ING note that the USD was briefly hit yesterday by comments by Treasury Secretary Steven Mnuchin that there was no change to Washington's dollar policy ‘as of now’.

Key Quotes

“In reality, however, it will have to be US policy settings which make the difference. There’s no point trying to talk the dollar lower with loose fiscal and tight monetary policy. That is why it seems the White House is pressuring the Federal Reserve into reversing last year’s 100 basis points of rate hikes.”

“Comments from Fed members John Williams and Richard Clarida have also re-ignited expectations that the Fed starts off with a 50bp rate cut on 31 July – though our team still prefers 25bp. Importantly it is clear that the market has sunk its teeth into the disinflation, secular stagnation story and is only interested in the response from policy makers, rather than current data releases.”

“For the dollar, we’re impressed by the performance of Gold and believe investors will ultimately buy into the Fed’s reflationary efforts – which include a weaker dollar. Dollar weakness is also being supported by flows into emerging market local bond markets, where disinflationary trends led to rate cuts in Korea, Indonesia, South Africa & Ukraine yesterday and very likely in Russia and Turkey next week.”

“We doubt US consumer sentiment moves the needle on Fed expectations today, while Fed dove James Bullard may actually pour a little cold water on the chances of a 50bp cut when he speaks art 1710CET. DXY to edge to 96.35.”