· The U.S. dollar fell to a three-week low on Tuesday as rising bets on an interest rate cut by the Federal Reserve weighed on Treasury yields, while broader concerns about global growth sent investors buying into the safe-haven yen.
The benchmark 10-year Treasury’s yield fell to its lowest since September 2017 overnight, near 2%, after St. Louis Federal Reserve President James Bullard said a rate cut “may be warranted soon” given weak U.S. inflation and the threat to economic growth posed by global trade tensions.
· The Japanese yen has been the main beneficiary from a shift toward assets investors deem a safer bet. It rose 0.2% to 107.845 yen per dollar, its strongest since mid-January.
That hurt the dollar, which against a basket of currencies was down 0.1% to a three-week low, falling below 97 for the first time since April 18.
· The euro rose 0.3% to $1.1274, its highest since April 18, helped by dollar weakness.
The European Central Bank meets on Thursday, and investors are also eyeing flash euro zone inflation data due at 0900 GMT. Analysts remain cautious on its prospects.
· While expectations of a Fed rate cut and diminishing yields mostly drag the US Dollar (USD) down, the GBP/USD pair awaits fresh clues to stretch recent advances as it clings to 1.2665 ahead of the London open on Tuesday.
Fears of the US-led trade tension to weigh on the global economy have lately been highlighting the US treasury yields which slumped to a fresh 20-month low on Monday while recovering nearly 2 basis points to 2.107% during the press time.
Adding to the USD weakness could be speculations that sluggish data will push the Federal Reserve to refrain from its monetary policy tightening and rather announce the Fed rate cut during the present year.
Talking about the politics, the US President Donald Trump is in the UK for a three-day visit and has mostly tried to push the British government against China’s Huawei. However, the present PM Theresa May is likely to resist the same during today’s meeting with President Trump.
Also, Brexit deadlock remains far from solution as PM May has already stepped back from putting any proposals for vote during this week and shifted the burden to next PM, which in turn could raise possibility of a hard Brexit as both the influential lawmakers from the UK, namely Boris Johnson and Nigel Farage, are pressing for hard Brexit.
Technical Analysis
A successful break of 1.2670, including mid-January low, can propel the quote in the direction to 1.2710 and then to February bottom around 1.2775.
Alternatively, 1.2580, 1.2550 and December 2018 lows surrounding 1.2480 can keep entertaining sellers.
· EUR/USD extends its gains on growing speculation of a US rate cut
EUR/USD is trading above 1.1250, extending its gains. Market expectations of the Fed cutting rates have increased after Bullard suggest a move in the near future. Euro-zone inflation is eyed next.
A sharp drop in Treasury yields helped EUR/USD chalk out a bullish breakout on the technical charts. The bullish breakout may fail if the Eurozone inflation data prints well below estimates.
The shared currency picked up a strong bid on Monday and closed with 0.64% gains at 1.1240, confirming an upside break of the descending triangle represented by trendlines connecting April 17 and May 13 highs and April 26 and May 23 lows.
The breakout represents a bearish-to-bullish trend change and has opened the doors for a convincing move above the 50-day MA of 1.1277.
· The outlook in the manufacturing sector fell to its lowest point since October 2016 as the lengthening US trade dispute with China forces a reconsideration of global and national economic growth.
The purchasing manager’s index from the Institute for Supply Management dropped to 52.1 in May from April’s 52.8, missing its median expectation of 53.0.
Business optimism had begun to decline from its record high of 61.3 in August 2018 before the partial government shutdown in January roiled sentiment indicators. Overall PMI fell to 54.3 in December, returned to 56.6 in January and has been ratcheting lower since.
Manufacturing optimism had maintained itself throughout last year despite the trade dispute with China and the imposition of competing tariffs. The argument was seen in the context of the vast exchange between the two countries and the importance to the relationship to both sides.
The American complaint in early May that China had reneged on several key points that had already been agreed led US President Trump to raise tariffs on a large portion of Chinese imports from 10% to 25%.
Although there are currently no talks scheduled both parties have recently expressed a willingness to resume negotiations. Senior officials from the US and China will attend preliminary meeting of the G-20 in Japan this month and a possible meeting between Presidents Trump and Xi Jinping at the G-20 summit is possible.
· Trade uncertainties are high on the minds of investors and businesses — but they’re not the only risk facing the U.S. economy right now, said Mary Daly, president and chief executive of the Federal Reserve Bank of San Francisco.
The global economy is slowing and the circumstances surrounding how the U.K. eventually leaves the European Union have also affected economic activity, Daly told CNBC’s “Street Signs” on Tuesday.
“I don’t want us to get too focused on only trade when there are these other looming uncertainties that also need resolution,” she said.
Still, Daly — who is not a voting member on the policy-setting Federal Open Market Committee — reiterated that the U.S. economy is “in a good place” given that it is close to full employment, inflation is slowly inching up toward the Fed’s 2% target, and the federal funds rate is near “neutral.”
That means the Fed can afford to wait before making its next monetary policy move, she said. “I think patience is the way we should be right now,” she added.
Daly said for now, the biggest risk facing the U.S. economy is uncertainty affecting business sentiment. She warned on Monday that the American economy — which is the largest in the world — could be in danger if business sentiment and economic data end up “getting out of sync.”
· Mexico’s Economy Minister Graciela Marquez said on Monday that the tariffs U.S. President Donald Trump has threatened to place on Mexican exports would impact all 50 U.S. states and harm value chains, consumers and trade-related jobs in both nations.
In a joint statement with Marquez and other senior government officials, Agriculture Minister Victor Villalobos said the proposed tariffs would cause total economic damage to the agriculture sector of $117 million per month in both countries. Villalobos did not specify at what level of tariffs this damage would occur.
· Japan and the United States will hold working-level talks on trade in the United States on June 10-11, Japan’s economy minister, Toshimitsu Motegi, said on Tuesday.
During the talks, the two countries will discuss technical aspects of industrial and agricultural goods trade, Motegi told a news conference after a regular cabinet meeting.
· A worrying slowdown in India’s economy makes a cut in the central bank’s benchmark interest rate highly likely this week, but analysts say policymakers should also find ways to boost banks’ liquidity to ensure they drop their lending rates too.
Beginning a three day review on Tuesday, the Reserve Bank of India’s six-member monetary policy committee (MPC) can draw comfort from subdued inflation. Running at 2.92 % annually in April, it has stayed below the medium term target of 4% for the past nine months.
· Oil prices fell on Tuesday as an economic slowdown starts to dent energy demand, but markets won some support after Saudi Arabia said a consensus was emerging with other producers about extending supply cuts.
Front-month Brent crude futures were at $60.97 at 0648 GMT. That was 31 cents, or 0.5%, below last session’s close.
U.S. West Texas Intermediate (WTI) crude futures were at $53.05 per barrel, down 20 cents, or 0.4%, from their last settlement.
Reference: Reuters, CNBC, FX Street
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