U.S. Dollar Slides over Concerns of a Potential Rate Cut
Tuesday saw the U.S. dollar slide to a three-week low versus a basket of currencies as weak inflation led to concerns the Fed may cut rates, which resulted in pressure on Treasury yields.
James Bullard, President of the St. Louis Federal Reserve, stated that the weak level of inflation is an indicator a rate cut may soon be necessary. Continued trade tensions that could threaten growth are also a concern. This led to the 10-year Treasury yields falling close to 2% overnight, which is their lowest level since September 2017.
Yen Gains on Back of Pessimism
Investors have flocked to the Japanese yen in an effort to protect themselves from the weakening dollar, which will only slide more if trade tensions continue. Thus, the yen was trading at 108 versus the U.S. dollar, which is close to its 4-month high.
The strong yen dragged the U.S. dollar index down slightly, with the latter trading at 97.067 after dipping overnight to a low of 96.917.
Antje Praefcke, an analyst with Commerzbank, stated that there is no positive support for the dollar. She explained that U.S. yields will continue to be pressured because the market is concerned about what real effects the trade conflict will have over the economy. Combined with the market essential crying out for rate cuts, the situation is far from rosy.
Euro Strengthens as Market Waits for ECB Decision
The market is waiting for Thursday when the ECB will announce their rate decision. The general consensus is that the European Central Bank will take a dovish stance regarding future rate decisions due to the weak economic data the Euro Zone has been releasing.
German bond yields, for example, have continued to remain under pressure at record low levels. This is an indication to the market that the ECB will continue their dovish outlook and might even consider stimulus initiatives in the relatively near future.
While the expectations surrounding the euro should have led to a weakening in the European currency, the EUR/USD is continuing to experience a rally that has been uninterrupted over the past three trading days. Thus, the EUR/USD reached a six-week high, with only a slight dip towards the end of the European session, when it was trading at 1.12384.
This rally is in large part due to the pessimistic outlook of the market on the U.S. dollar. The odds are highly in favor of at least one rate cut taking place until the end of the year, with the market giving it a 98.3% chance of occurring.
British Pound Rallies After a Five-Month Trough
After experience a trough lasting five months, the British pound rose slightly to 1.2656 against the dollar. This small recovery is mainly due to optimistic market sentiment over trade relations between the U.K. and the U.S.
At a press conference in London, President Donald Trump stated that he believed Prime Minister Theresa May had done a good job regarding Brexit negotiations and that she’s likely a better negotiator than he is. More importantly, President Trump assured that there would be a substantial trade deal between the United Kingdom and the United States.
Trump further showed his support by stating that the departure of the U.K. from the European Union will be good for the country.
These statements seemed to boost market optimism enough to keep the pound from diving on the back of concerns that the new PM might force a hard Brexit. If this is the case, experts predict early General Elections might have to be held as Parliament will block the move.