Fed rate cut

FOMC June 19 Meeting Should Prepare Markets for Rate Cuts, USDJPY, EURUSD

The June meeting will be one of those meetings when the Economic Projections are updated, and currently, economists are projecting that the FOMC will use the June meeting to a hint of a rate cut, maybe as early as in July. At least that is what the rates markets is currently pricing in with an 86.9% probability.

There are a few reasons why the market has turned dovish. First, the composite Markit PMI indicator has dropped sharply over the last few months, and is now nearing the 50-boom-bust threshold, and indicating very low growth going forward. If the index slips below 50, it will suggest that the U.S. economy has stalled. Second, in the latest reading, US PCE Core inflation, dropped to 1.57% from being around the Fed 2% target from August 2018 until early 2019. Having interest rates at current levels while the Markit PMI is dropping sharply and thereby suggesting demand is dropping does not bode well for future inflation.

Third, the U.S. employment growth has been very poor in 2019, and February and May showed job growth of 56k, and 75k respectively. Fourth, neither the US or China are backing down, and it looks like the economic war will be prolonged. The situation might even escalate if the US increased tariffs further.

As the ECB is not ready to make any changes to its monetary policy, and the Euro is acting as a funding currency, it looks likely that the EURUSD could drift higher in the months ahead as the Fed cut rates and the ECB leaves their policy unchanged. We could also see a large reaction in the USDJPY, and we might see the price trade lower, as once again the USD is here traded against a funding currency.

As for the USD vs. the Australian and New Zealand dollars, I think it is unlikely that we see the dollar weakening too much, as the RBA and RBNZ will probably continue to remain dovish as their economies are soft. For my technical levels in EURUSD and USDJPY please see the video below.

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This market update was provided with an educational purpose, and is the personal opinion of Alejandro Zambrano, and not to viewed as trading advice by ATFX or Red Castle Ideas LTD.