The DXY Index appreciated by 0.2% to 101.39 overnight but remains within a tight week-long range of 101 and 101.8. US bond and equity markets will be fully closed on Friday for the long weekend Independence Day celebrations. The hawkish Fed hike trade triggered by the June 17 FOMC meeting is running up against the market’s pricing for a September Fed hike, which is stalling around the 50% probability level.
At the policy panel of the European Central Bank Forum on Central Banking in Sintra, the unified message from ECB President Christine Lagarde, Fed Chair Kevin Warsh, Bank of England Governor Andrew Bailey, and Bank of Canada Governor Tiff Macklem was a joint retreat from forward guidance and a collective stance that inflation remains too high. Despite the welcome relief that plummeting oil prices lower immediate inflation risks, none of them saw a return to rate cuts, choosing instead to maintain a wait-and-see stance on rate hikes.
Lagarde described the risks to Eurozone inflation and economic growth as broadly balanced, following the decline in the EU CPI Estimate to 2.8% YoY (-0.1% MoM) in June from 3.2% YoY (+0.1% MoM) in May. EUR bears should heed Lagarde’s comments. The EUR’s failure to rally on last month’s ECB hike was interpreted as a defensive move to raise borrowing costs into a slowing Eurozone economy amid a surprisingly hawkish FOMC meeting. EUR/USD has been holding around 1.14 this week after bottoming at 1.1325 on June 24.
Warsh said that price risks have come down in recent weeks, as reflected in the ISM Manufacturing Prices Paid Index plunging to 73.0 in June from 82.1 in May. While he welcomed the relief on headline inflation, he said that the Fed would focus on core inflation data at the July 29 meeting before deciding on interest rates. Today’s US nonfarm payrolls may not provide USD bulls the willingness to add long USD positions over the long holiday weekend. Although Treasury Secretary Scott Bessent expects a strong number, consensus sees a moderation to 113k in June, following three months of readings between 172k and 214k. More attention may fall on average hourly earnings, which fell to 3.4% YoY in May from 4% in the same month a year ago.
In the end, July 14 will be the most important date this month because of the CPI data release and Warsh’s semi-annual congressional testimonies on monetary policy.
Quote of the Day
“It is a capital mistake to theorize before one has data.”
Sir Arthur Conan Doyle
July 2 in history
North and South Vietnam officially reunified in 1976 as the Socialist Republic of Vietnam.
Topic
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