Our USD thesis is very much holding true. In fact, the fait accompli around the cut to the Federal Funds Rate has been strengthened further by several events of the past week.
– New York President John Williams confirming that its ‘better to take preventative measures’
– Vice Chair Richard Clarida followed this comment in an interview with Bloomberg with this comment: ‘When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress’
– Chair Jerome Powell: “Uncertainties about this outlook have increased, particularly regarding trade developments and global growth…[We] will act as appropriate to dustain the expansion”
The fait accompli of the July FOMC meeting has moved to a debate about how much will the Board cut on the 31st? Will it be 25-basis point (bps) or a hard faster 50bps.
As of last week, there was a growing trend from traders that a 50bps cut was now becoming a possibility. Since the remarks above the probability of a 50bps cut have moved from 17% at the start of the week to 40% at time of writing, the momentum suggests it will go past 50% before the meeting.
This all but locks in USD weakness over this period; thus we again highlight ‘choice’ as the USD will tends to ‘overpower’ in all pairs.
However, will need to single out GBP and EUR as possible numerators to ignore for the following reasons:
– Final week of the ‘mini-election’ for the PM role. Boris Johnson looks the most likely however Jeremy Hunt is still very much in the mix.
– A Brexit ‘no deal’ risk is building rapidly
– Bank of England is becoming dovish
All are risks on the GBP side
– ECB meeting this week, likely to signal further accommodation
– Could cut Deposit and Lending rates as early as this week.
Risks on the EUR side
The trade here is in the USD, thus look for pairs where the opposite currency is in a ‘neutral’ or ‘rising’ bias. It why we are adding to our AUD/USD long positions we have taken over the period weeks.