Trade uncertainties, Trump’s pressure to cut interest rate and weakening economic data: all seems blurred as to how the Fed should react. Market interpretation should play an important role in the future development of the greenback as well. Treasuries continue to gain traction, with yields lowest in over a year across all maturities as expectations of Fed Funds Rate cuts, uncertainties amplify. Although no rate cuts are expected for Wednesday meeting, changes in forward guidance and the Fed’s dot plot are largely anticipated.
During its monetary policy meeting, the Fed is about to turn more dovish, with a shift in language from “patient” to more flexible, paving the way for one rate cut this year and additional easing in 2020 as well. GDP and inflation forecasts currently set at 2.10% and 1.80% will likely be revised downwards as deteriorating economic data support the trend. Nominal and Core PCE given at 1.50% (prior: 1.40%) and 1.60% (prior: 1.50%) in April remain below the 2% target while manufacturing activities downtrend are approaching contraction territory as a result of escalating trade war with China. Furthermore, major problems related to Trump's interference in the Fed's affairs constitute a major obstacle for the central bank, which is supposed to preserve its independence to ensure credibility and avoid long-term difficulties, in particular when stabilizing the economy and the dollar. Certainly, an escalation of political pressure would most likely negatively affect USD and conversely the US economy.
As ECB President Mario Draghi speech about stimulus is weighing on the EUR, we expect EUR/USD (1.1185) to approach 1.1175 short-term while June ZEW figure of -20.2 (prior: -1.6) for the Eurozone should support the decline.