USD on the back foot as July rate cut coming
In the wake of the Fed chair testimony yesterday, the mood in the market has turned 180 degrees, with the prospect of an FOMC rate cut now (effectively) rubber stamped. Despite the strong jobs report last Friday - which maintained a USD bid in the early part of the week - we are now looking at other dynamics which could point to more cuts in the months ahead. Indeed, there are some who still believe the Fed may cut more than 25bps.
This is down to the view on inflation. The Fed has a dual mandate, which means that it looks at both employment and inflation. The jobs market remains strong, though last month's numbers were still put the moving average of monthly gains at 150-170k. Alongside this, wage growth is not picking up anymore and the Fed is a little concerned.
This feeds into the view that inflation could remain sluggish for a while longer, and today's release of US CPI could be a big clue as to how the Fed outlook will play out. So far, the market is pricing in 50bps of cuts this year - one this month, and once in Sep or Dec. If the numbers start to weaken in the US, the market will start pricing in a little more and the USD will soften further.
As such, we have seen USD/JPY taking a hit, dropping under 108.00 (in Asia), but finding support in the 107.85 area for now.
Similarly, EUR/USD has pushed higher again after the brief dip under 1.1200 this week, though we have some resistance here in the 1.1280-90 area which seems to be holding off the market for now. 1.1250 and 1.1230 are support points.
Cable is also stalling - with 1.2540-45 providing resistance, but the big level here is at 1.2590 or so, so this is what we will be watching for while on the downside, it seems we have some near term demand just under 1.2500.
The interesting one, later on, could be USD/CAD, which continues to find sellers in the 1.3135-45 area. The CAD has seen increased demand recently off the back of improved data, with rate differentials also supportive - interest rates here on hold at 1.75% for now. A move under 1.3000 would see us testing key support in the 1.2950 area.