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We do not rule out the USD’s appreciation in the first half of the year reversing in the second half. Fed Chair Jerome Powell may start paving the ground for its first interest rate cut in 3Q24 when he testifies before the US Senate Banking Committee on July 9. More Fed officials see US inflation falling in the second half of the year and do not consider it necessary for inflation to hit the 2% target before removing top level policy restriction. Friday’s US PCE deflators should mirror the slower CPI inflation a fortnight ago. Consensus expects headline inflation to slow to 0% MoM (21.6% YoY) in May from 0.3% MoM (2.8% YoY) in April and the core deflator to 0.1% MoM (2.6% YoY) from 0.2% MoM (2.8% YoY).
Fed officials were more attentive to the higher unemployment rate at 4% in May. They see monetary policy working to slow consumer spending and forcing retailers to lower prices. Hence, stay alert to a drop in the US Conference Board’s Consumer Confidence Index on June 25, especially after the University of Michigan’s Consumer Sentiment Index fell a fourth month to a seven-month low of 65.6 in June.
GBP/USD depreciated for a third week by 0.3% to 1.2645 last week. Although UK CPI inflation hit the 2% target in May, the Bank of England did not lower rates at its meeting on June 20. Core and services inflation remained lofty at 3.5% and 5.7%, respectively. According to the Decision Maker Panel (DMP) survey in the three months to May, UK businesses expected the frequency of services price increases to normalise further over the course of this year.
Polls predict a historic victory by the opposition Labour Party at the UK snap elections on July 4. However, the election appears more about a referendum against the ruling Conservative party than one of popular support for the opposition. Labour needs to overcome the fiscal constraints standing in the way of its promise of a British rebirth and renewal. Labour Party leader Keir Starmer has ruled out reopening the Brexit debate, but Brussels was hopeful of better relations with London under him.
EUR/USD faces downside pressure in the lower half of this quarter’s 1.06-1.09 range. The polls do not rule out the far-right National Rally (RN) party winning a majority in the French snap elections that will be held in two rounds on June 30 and July 7. RN leader said he would not become prime minister if his party and allies did not win an absolute majority. The next government is set to clash with the European Commission, which launched an “excessive deficit procedure” against France for breaching fiscal deficit and public debt rules.
The outcome of the French elections will be of significant interest to the European Central Bank at its forum on central banking in Sintra during the first week of July. Despite fears of France exiting the EU or ending up with a gridlock government, 2017 demonstrated that the EUR could recover quickly if the 10Y yield differential between French and German bonds pulls back after widening to 80 bps.
USD/JPY rose 1.5% to 159.80 last week, its highest close since April 1990. On June 20, the US Treasury Department (USTD) added Japan to the currency monitoring list. However, the USTD clarified that the decision was not attributed to Japan’s interventions in April-May to prop up the JPY but for meeting two of the three mechanical criteria, i.e., a bilateral trade surplus of USD62.4bn (vs. USD20bn criteria) with the US and a current account surplus of 3.5% (vs. 2% criteria) of GDP in 2023. The USTD considered Japan to be transparent in its forex operations, i.e., the recent interventions were carried out after the Washington-Tokyo-Seoul joint statement to consult closely on forex. All said, USD/JPY looks toppish on a year-to-date basis. The third quarter could see the Fed paving the way for rate cuts alongside the Bank of Japan hiking rates again and reducing JGB purchases.
Quote of the day
“You cannot change the beginning, but you can start where you are and change the ending.”
C.S. Lewis
24 June in history
Siam was renamed Thailand in 1939, seven years after a bloodless coup that ended the absolute power of the King.
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