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Greenback under pressure on dovish Fed expectations

Albert Edwards
by Albert Edwards on July 21, 2019


USD defensive as risk aversion dropped yields and the dollar index lower. After dovish comments from Fed officials Williams and Clarida, USD also under pressure. House speaker Nancy Pelosi said she will not accept the latest debt ceiling offer. The greenback recovered after stronger than expected retail sales data last week, however, concerns about the ongoing trade dispute with China limiting any USD strength. Fitch rating agency also noted the trade war could become a currency war. In addition, the International Monetary Fund said USD is overvalued by 6% to 12% last week (due to economic conditions). Markets are still expecting the Federal Reserve to cut interest rates by 25 bps at the next policy meeting (July 30-31). A larger rate cut of 50 bps is also possible and this would drop the greenback lower. Focus for USD this week will be the GDP Growth Rate for Q2 available on Friday.

Canadian dollar highlights:

CAD strengthened last week after home prices increased 0.8% and 30.4K jobs were added in June. However, Retail Sales for May disappointed at -0.1% (compared to 0.3% gain expected) due to low sales in food and beverages. This was the first decline in four months (due to bad weather). Markets are now concerned the Bank of Canada may also cut interest rates this year. Currently a 57% chance the central bank cuts rates in December after the data (from 50%). After an American warship downed an Iranian drone near the Strait of Hormuz, oil prices recovered as tensions in the Middle East increased demand. Focus for CAD this week will be Producer Prices for June and GDP for May available Wednesday.

Euro highlights:

EUR under pressure as markets are expecting the European Central Bank to cut interest rates this week. Currently a 60% chance of a 10 bps rate cut and the central bank could also revise its inflation target lower. Further accommodative measures are expected to be announced during the July or September policy meeting (including Quantitative Easing). German Chancellor Angela Merkel said the economy is in a difficult phase with slower growth and this has also affected EUR lower. Focus for EUR this week will be the Interest Rate Decision followed by the central bank press conference on Wednesday.

British pound highlights:

GBP remains vulnerable as markets focus on the increased risks of a no-deal Brexit by the October 31 deadline. Parliament members voted last week to make it harder for the next Prime Minister (likely Boris Johnson) to force a no-deal Brexit, however, there is still a 40% chance of a hard Brexit. Johnson is planning to surround his cabinet with mostly euro sceptics and refused to rule out suspending parliament to block his plan, causing increased risk. Focus for GBP this week will be the latest central bank policy minutes available tomorrow.


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