Monday, July 22, 2019

Fed to cut rates by only 25bps at the end of the month, the Dollar turns positive

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
  • Oil

MORNING BRIEFING

The Dollar ended the week on a high note on Friday after the odds for an aggressive 50bps rate cut by the Fed were again re-adjusted lower. Ultra-bearish remarks from Fed’s Williams had driven the odds significantly higher mid-week but the NY Federal Reserve looked to clarify that his comments were not intended to hint on July’s meeting. Later in the day, a report indicated that policymakers only favor a conservative 25bps move setting up the greenback for a recovery rally across the board. Equities ended the day in the red as a response, Gold pulled back from its $1,450 highs while Oil consolidated just above the $55 mark.

So after much debate it seems that the Fed is primed for only a conservative 25bps cut during this month’s FOMC meeting. We have long expressed our view that the US central bank will go ahead and ease policy but we also cited the reasons why we feel that a “one and done” approach would seem more reasonable: yes, the domestic economy has been slowing down over the recent months and indeed, global geopolitical risks still persist making the cut a necessity. However, with the Fed not having as much space available to the downside as it used to do in the past - with rates nowhere near their historic highs - the timing and magnitude of the reductions need to be managed appropriately.

Barring a very nasty surprise over the next few days, we believe that the case for a move on July 31st is closed and the Fed will deliver its first easing decision by cutting rates by a quarter of a percent. As such, we expect the Dollar to remain well supported in the interim as the decision seems pretty much priced in by now and actually, overly dovish investors would have to dial back their extra-bearish bets. There’s a host of incoming data this week, with the US GDP report the most prominent one, and the way this prints will start shaping expectations for a continuation of rate cuts starting September or a steady policy going forward. In favor of full disclosure, we believe the odds for the former are higher but we will have plenty of time to discuss this in the coming weeks.

This week however will the ECB’s turn to attract investors’ attention and deliver their decision in regards to interest rates’ policy. Will the ECB be the first major central bank to pull the trigger and ease policy? Currently, the odds are split and we will have to wait until Thursday to find out but in any case, we remain bearish on the Euro in light of the underwhelming Eurozone performance and dovish ECB bias. Prices have returned close to the 1.12 area, as we expected, as last week’s gains did turn out to be short-lived. Looking ahead, there’s a set of incoming data between now and Thursday but the shared currency should retain its dovish outlook.

Gold retreated from its $1,450 highs at the end of last week when the case for an aggressive Fed cut became less likely. The yellow metal is currently trading around the $1,425 area and its short-term outlook seems unclear. We believe that the price action for Gold going forward will depend on the upcoming US data which, as we mentioned above, will shape expectations for continued easing from the Fed or a steady policy. In the longer term though, we remain bullish on Gold: as soon as the major central banks start reducing rates, the resulting higher inflation expectations should keep the demand in place.

Equities were mostly negative on Friday with the US markets closing below water and their European counterparts ending the week mixed. This morning, futures on both sides of the pond are trading flat highlighting the indecision among the market participants. On the one hand, an easier monetary policy in the US - and possibly Europe - will be a supportive catalyst for equities. On the other though, there are simply no other reasons to suggest that stocks will continue moving higher in the medium term so we should remain cautious as things could turn around in a hurry.

MARKET EVENTS TO WATCH

  • No important events or reports scheduled for release today.

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research