Morning Commentary: “An Ounce of Prevention is Worth a Pound of Cure” --Benjamin Franklin

Foreign Exchange - Morning Commentary
“An Ounce of Prevention is Worth a Pound of Cure”
Benjamin Franklin
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Yesterday, the Federal Reserve delivered a dovish hold and kept interest rates unchanged as expected. However, Fed Chairman Powell stated during his press conference that “the case for somewhat more accommodative policy has strengthened” and added that the Fed would “act as appropriate to sustain the expansion”.  The change in tone and language from the previous meeting caused a sharp reaction in U.S. interest rates with U.S. 2-year interest rates dropping sharply (down nearly 15 bps from the opening) and caused the U.S. dollar to lose ground against almost all the major and emerging market currencies.
Overnight, G7 interest rates have continued to fall with the U.S. dollar (DXY) weakening further and gold rising to its best levels in almost five years. Increased and escalating tensions in the Middle East, with Iran downing a U.S. military drone overnight, have caused a further flight into safe haven assets as the Swiss franc and gold are outperforming today.  Global equites continue to remain euphoric in the short term as the combination of the ECB and the Fed continuing their mantra of doing whatever it takes to sustain the economic expansion is continuing to provide the backdrop for positive equity sentiment.
Markets have now priced in a 100% probability that the Fed will cut interest rates by 25 bps at the July 31 meeting (83% yesterday) with some discussion of the possibility of a 50 bps rate cut in July. Many economists are also looking for another Fed rate cut in Q4. We remain tilted toward a slightly weaker U.S. dollar through year end.
The next major hurdle for the markets will be the G20 meeting next week with particular focus on the outcome of the meeting between President Trump and President Xi as they attempt to find a path to resolve their trade dispute.
  • While many other central banks left interest rates unchanged overnight (Japan, Indonesia, Taiwan, Philippines, and the U.K.) Norway raised its interest rates by 25 bps to 1.25%, which was largely in line with expectations. This is the third consecutive hike since September as economic activity continues to strengthen and underlying inflation remains above the official 2% inflation target. The central bank also indicated that further rate hikes may be necessary.  The Norwegian krone is the top performing currency overnight, up sharply by ~1.70%.
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