Optimism for a Fed rate cut “soon” soared last week after Friday’s jobs report drastically undershot assumptions. Trade frictions also remained in focus with the ongoing rift between the US and China, and the impending tariff on Mexico. But there were also some hopes for a rapprochement, and indeed a deal was made with Mexico that will avert tariffs for now.
The weak data added fuel to the markets’ simmering fears that a recession is coming, allowing Fed rate cut expectations to burn brighter as traders remembered Bullard’s comment that a cut could be warranted “soon”. Indeed, risks for an easing this year have increased markedly, especially in the wake of the weak job numbers and with the slowing in the pace of earnings growth. But a move as soon as the June 18-19 FOMC meeting seems unlikely (the next meeting would be July 30, 31) as it is difficult to tell how much of the erosion is a function of trade and other uncertainties, or just noise within a tight labor market. Most Fed officials have indicated they want to see how the trade frictions impact, and allow the economy to play out in the coming months. We don’t expect any near term action , but the softer wage data certainly leaves the door open for a move and would give the FOMC cover. The FOMC is projected to adopt a more dovish tone, however, likely jettisoning the “patient” characterisation in favour of “monitoring developments.”
Along with the monetary policy and geopolitical issues, US data will be important given this week’s key numbers on inflation, retail sales, and production.
The US May inflation gauges highlight the data docket and they should support a dovish stance from the Fed later this month. Other real data are expected to be mixed, but generally reflect a still decent economy. Modest increases for the headline and core CPI measures are expected, with small declines anticipated for the trade price indices thanks to an Oil price drop in May and a rising Dollar since January. Firm gains are on tap for Retail sales, driven by a savings rate downtrend as spending continues to recover from the winter setback. A down-tick in industrial production is anticipated, with our forecast informed by weak hours-worked in the May jobs report and another likely decline in utility production. But consumer sentiment will likely remain firm.
Meanwhile, the Dollar has rallied across the board in the wake of news that the US and Mexico have reached a deal on migration, which in turn has allayed investor concerns on trade. The narrow trade-weighted USD index rallied by nearly 0.5% from Friday’s 12-week low in making a high earlier at 97.85.
EURUSD concurrently receded below 1.1300 after peaking at 1.1347 on Friday. Technically, the asset has formed high movement the past 6 days, topping above the 7-month down channel, just a breath away from the 200-day MA. The decisive break of the key Resistance at 1.1300, and hence the upper trendline of the channel added concerns regarding whether this upwards move could be sustained. Therefore today’s session, and in general the week, could be key on EURUSD’s future performance.
So far today momentum is positive, but the increase of positive bias needs to be sustained in order to assert a switch of the overall bearish outlook. Intraday, Support is set at 1.1262-1.1270 and Resistance at 1.1310 and 1.1330. A reversal to last week’s Support which coincides with 50-day SMA, at 1.1215, could suspend the upside swing.
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