Dollar Volatility Ahead: Market Movers Line Up in Busy Week
Summary:
The US dollar has been underperforming its major peers this week, with a ceasefire between Israel and Iran being announced by President Donald Trump. Although there were some initial concerns about the agreement, it has held up over the past couple of days, allowing for a risk-on market response. The US dollar acted as a safe haven during this conflict but may also have been impacted by President Trump’s attacks on Fed Chair Powell. These comments have raised concerns about the Federal Reserve’s independence and led investors to increase their rate cut bets.
ISM PMIs and Nonfarm Payrolls Take Center Stage
The spotlight is on the ISM manufacturing and non-manufacturing PMIs for June, due out on Tuesday and Thursday respectively, but it’s likely that attention will focus on the NFP report for June scheduled to be released on Thursday. The JOLTs job openings for May are also set to come out on Tuesday, followed by the ADP private employment report for June on Wednesday. This week saw preliminary S&P Global PMIs come in higher than expected, with the composite index pulling back somewhat to 52.8 from 53.0 but remaining well above the forecast of 52.2.
Price pressures rose sharply in both manufacturing and services sectors, with the former reporting an especially steep increase due to tariffs. Companies increased employment at a rate not seen for over a year, largely in response to higher workloads. If the ISM figures paint a similar picture, investors may scale back their rate cut bets, especially if non-farm payrolls indicate that the labor market is performing well. However, with some Fed members already leaning dovish and supporting a July cut, like Fed Governors Waller and Bowman, any recovery in the US dollar would likely remain limited and short-lived.
Concerns surrounding the credibility and independence of the Federal Reserve continue to grow, following reports that President Trump is considering announcing Powell’s successor as early as September. This has significant implications for the market, with investors becoming increasingly bearish on the greenback. The likelihood of a third rate cut by year-end remains high, and Fed funds futures have fully priced in nearly 65bps worth of rate cuts.
Eurozone Inflation Data Set to Influence ECB Rate Cut Expectations
Equities rebounded strongly this week on news that President Trump announced a ceasefire between Israel and Iran. Oil prices fell as supply concerns eased, allowing the US dollar to pull back. Another development this week was that Fed Chair Powell faced new attacks from President Trump over not lowering interest rates, raising concern about monetary policy efficacy. Investors are increasing bets for rate cuts ahead of the upcoming ISM PMIs reading.
Market participants now expect almost 65bps worth of rate cuts by year-end, following on from the two quarter-point reductions indicated by the Fed’s recent dot plot. A third rate cut is likely to be added soon. The probability of acting as quickly as July has risen to 25%, underscoring concerns about inflation dynamics. As investors assess potential future interest rate adjustments from central banks worldwide, they will turn their attention to upcoming data releases.
Eurozone Inflation Data Expected to Influence ECB Rate Cut Expectations
The US dollar pulled back this week after the ceasefire announcement and following attacks by President Trump on Fed Chair Powell, raising concern about monetary policy efficacy. Investors are increasing bets for rate cuts ahead of the upcoming ISM PMIs reading. Market participants now expect almost 65bps worth of rate cuts by year-end.
Preliminary S&P Global PMI data came in higher than expected this week, with price pressures and employment both on the rise. However, if the ISM figures paint a similar picture, investors may scale back their rate cut bets. The likelihood of a third rate cut remains high.
Fed Funds Futures Now at Odds with Dot Plot
The probability of acting as quickly as July has risen to 25%. This reflects an increase in rate cut expectations following attacks by President Trump on Fed Chair Powell over monetary policy issues.
This week’s US data will help build the market’s understanding of inflation dynamics. The ISM PMIs are due on Tuesday and Thursday and the spotlight is likely on the NFP report for June, scheduled to be released on Thursday. With a rising likelihood of continued dovishness at the Fed, the dollar’s safe-haven status may continue.
Euro traders will have to assess the Eurozone’s preliminary CPI data for June due next week, as inflation expectations shape rate decisions by ECB policymakers. Central bankers are increasingly confident about their ability to navigate uncertain economic circumstances with the current interest rate levels, a fact that is reflected in market sentiment towards euro/dollar pairs.
China PMIs, Japan’s Tankan Survey and Swiss Deflation Keep Traders Busy
The Federal Reserve’s latest moves have had little impact on Asian currencies this week. The US dollar has fallen against major peers and equities rebounded strongly following President Trump’s announcement of a ceasefire between Israel and Iran earlier in the week. However, with ongoing uncertainty surrounding monetary policy, investors remain wary. Asian markets will be looking at China PMIs for June due next week along with Japan’s Tankan survey.
Switzerland’s CPI data has drawn more attention lately amid persistent deflationary pressures that led market participants to lower rate cut expectations slightly from 30% down to 25%. Although it is unlikely these factors may affect Fed decisions directly, investors will still be closely following the data released at the end of next week.
