Increasing Odds of a Fed Rate Cut Weigh on Greenback
What’s been happening?
Pound Sterling – UK Markets
The British pound failed to capitalize on broad dollar weakness and Monday and closed the day virtually unchanged but suffered losses vs the shared currency. The only data from the UK on Monday revealed that the business activity in the manufacturing sector contracted in May with the IHS Markit’s headline Manufacturing PMI dropping below the 50 mark and touching its lowest level in nearly three years at 49.4 to reflect the negative impact of Brexit on the sector.
“The UK manufacturing sector was buffeted by ongoing Brexit uncertainty again in May,” said Rob Dobson, Director at the IHS Markit. “The trend in output weakened and, based on its relationship with official ONS data, is pointing to a renewed downturn of production.” Dobson further concluded that the slowdown in the global economy and trade wars hotting up could continue to hurt the sector and cause in to remain in the contraction territory.
US Dollar – US Markets
The greenback came under a renewed selling pressure in the second half of the day on Monday after the disappointing Manufacturing PMI data hinted at an economic slowdown and ramped up the odds of a rate cut this year.
The IHS Markit’s Manufacturing PMI came in at 50.5 in May, the lowest reading since September 2009, following April’s 52.6 reading and fell short of the market expectation of 50.6. Commenting on the data, “While tariffs were widely reported as having dampened demand and pushed costs higher, both producers and their suppliers often reported the need to hold selling prices lower amid lacklustre demand,” said Chris Williamson, Chief Business Economist at the IHS Markit. Moreover, the ISM Manufacturing PMI dropped to 52.1 in the same period from 52.8.
Following these releases, the CME Group FedWatch’s Federal funds futures’ implied probability of a rate cut in July rose to 53% vs 18% a week ago. Additionally, odds of the Fed cutting rates at least twice before the end of the year rose to 80% from 70% a week ago. On the same note, St. Louis Fed President Bullard said a rate cut may be warranted on trade and inflation risks to further weigh on the currency. Meanwhile, Richmond Fed President Barkin argued that letting the U.S. economy run hot could boost the labour market.
Euro – European Markets
The shared currency gathered strength against both the dollar and the British pound as a better alternative amid the Fed rate cut talks and the Brexit uncertainty. Furthermore, the IHS Markit’s Manufacturing PMI readings for both Germany and the eurozone came in line with analysts’ estimate of 44.3 and 47.7, respectively. Assessing the data, “Euro area manufacturing remained in contraction during May, suggesting the sector will act as a drag on the wider economy in the second quarter,” said Chris Williamson, Chief Business Economist at the IHS Markit. “Trade wars, slumping demand in the auto sector, Brexit and wider geopolitical uncertainty all remained commonly cited risks to the outlook, and all have the potential to derail any stabilisation of the manufacturing sector.”
What’s coming up?
UK: The IHS Markit will release the Construction PMI (May-final) on Tuesday.
US: The ISM-NY Business Conditions Index and factory orders data will be featured in the U.S. economic docket. Later in the day, FOMC Chairman Powell is scheduled to deliver a speech as well. Especially following Chicago Fed President comments on Monday, investors will be looking for clues regarding a dovish shift in the Fed’s policy stance.
EU: The Eurostat will publish the euro area labour market and inflation data on Tuesday.