The dollar index (DXY00) on Monday fell by -0.32% and posted a new 1.5-month low. The dollar is under pressure from last Friday’s weak US unemployment report and the increased expectations for Fed easing through year-end. The dollar is also being undercut by concerns over Fed independence, which could prompt foreign investors to dump dollar assets as President Trump attempts to fire Fed Governor Cook, and by Stephen Miran’s intention to be a Fed Governor while still technically holding his White House job on the Council of Economic Advisors.
The markets are now pricing in a 15% chance of a 50 bp rate cut at the upcoming FOMC meeting on Sep 16-17, versus the previous expectations of a zero chance of that 50 bp rate cut. After the fully expected -25 bp rate cut at the Sep 16-17 FOMC meeting, the markets are now discounting an 81% chance of a second -25 bp rate cut at the Oct 28-29 meeting, up from a 54% chance as of late Thursday. The markets are now pricing in an overall -75 bp rate cut in the federal funds rate by year-end to 3.62% from the current 4.38% rate.
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EUR/USD (^EURUSD) on Monday rose by +0.40% and posted a 1.5-month high due to a weaker dollar. The euro also saw support as the markets view the ECB as largely finished with its rate-cut cycle, while the Fed is expected to cut rates three times by the end of this year.
Monday’s Eurozone economic news was mixed for the euro after German Jul industrial production rose more than expected, but the Eurozone Sep Sentix investor confidence index unexpectedly fell to a 5-month low.
On the geopolitical front, diplomatic efforts to end the war in Ukraine remain elusive, which is bearish for the euro. Also, political uncertainty in France is negative for the euro, with French Prime Minister Bayrou losing a confidence motion in parliament on Monday.
The Eurozone Sep Sentix investor confidence index unexpectedly fell -5.5 to a 5-month low of -9.2, weaker than expectations of an increase to -2.0.
German Jul industrial production rose +1.3% m/m, stronger than expectations of +1.0% m/m and the largest increase in four months.
German trade news was mixed as Jul exports unexpectedly fell -0.6% m/m, weaker than expectations of a +0.1% m/m increase. However, Jul imports fell -0.1% m/m, a smaller decline than expectations of -1.0% m/m.
Swaps are pricing in a 1% chance of a -25 bp rate cut by the ECB at the September 11 policy meeting.
USD/JPY (^USDJPY) on Monday rose by +0.03%. The yen posted modest losses on Monday due to political uncertainty in Japan after Japanese Prime Minister Ishiba said he will step down following two election results that stripped Japan’s ruling Liberal Democratic Party of its majorities in both houses of parliament,