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We are vigilant of downside risks in the USD in June. The Fed’s narrative to be patient on interest rate cuts has become more bark than bite without the backing of US data. At next week’s FOMC meeting, we expect the Fed to set a high hurdle for a rate hike and to stay the course for later and fewer rate cuts. With the US economy moving from exceptional growth towards a soft landing, the Fed will expect inflation to cool in 2H24, more so if Friday’s US nonfarm payrolls hold below 200k for a second month. More importantly, the EU and the UK economies have exited their technical recession in 1Q24. Other global central banks have also become more aligned with the Fed’s patience on rate cuts.
EUR/USD to break above its 1.08-1.09 range if the European Central Bank delivers a hawkish interest rate cut at its June 6 meeting. The ECB will not pre-commit to another cut after CPI inflation increased to 2.6% YoY in May, higher than the 2.5% consensus and 2.4% in the previous month. Core inflation also increased to 2.9% in May vs. the consensus for it to stay unchanged at April’s 2.7%. Last week, ECB Chief Economist Philip Lane said the governing council will follow a data-dependent and meeting-by-meeting approach.
USD/CHF is more likely to break below its two-month range of 0.90-0.92 than above it. Two events hijacked the only attempt to push above 0.92 on May 1. First, Fed Chair Jerome Powell said on May 1 that the Fed did not see the next interest rate move as a hike. Second, Switzerland’s CPI inflation release on May 2 rebounded from 1% YoY in March to 1.4% YoY in April, slightly below the Swiss National Bank’s policy rate of 1.4%. On June 6, another surprise in CPI inflation should end the odds for a back-to-back rate hike at the SNB meeting on June 20. Last week, SNB President Thomas Jordan warned of upside risks to the central bank’s inflation forecast from the CHF’s weakness and an R star (natural rate of interest) that could be higher than the present estimate of 0%.
USD/CAD has been confined to a 1.36-1.38 range since mid-April. The Bank of Canada is widely expected to lower its overnight lending rate by 25 bps to 4.75% at its June 5 meeting. On May 28, Finance Minister Chrystia Freeland fuelled rate cut bets with her comments that the federal budget presented in April would create the conditions for inflation to fall and the BOC to bring rates down. Last Friday, the Canadian economy also disappointed. Apart from growing by an annualized 1.7% QoQ saar in 1Q24, slower than the 2.2% consensus, 4Q23’s GDP growth was revised to 0.1% from its preliminary 1% estimate.
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“Virtue debases itself in justifying itself.”
Voltaire
3 June in history
Canada announced that it would replace silver with nickel in coins in 1968.
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