Richard Franulovich, head of FX strategy at Westpac, suggests that the immediate risks to the US outlook from tariffs on Mexico have been averted but May jobs were weak beyond trade-exposed sectors and consumer prices have extended their soft streak into May, calling into question the Fed’s “transitory” thesis.
“FOMC likely downgrade their assessment of current conditions and underscore heightened global risks. “Patience” is likely replaced with a promise to “act as appropriate” and the dots likely see a clear dovish tilt.”
“A new lower 2019 median incorporating a cut is unlikely though – an overwhelming 9 of 11 dots at the median favouring no change (2.375%) need to pencil in a cut. However, the 2020 median for a hike and the six dots projecting a hike in 2019 are surely wound back.”
“A clear signal in the statement and Powell’s press conference that the Fed is open-minded toward cuts likely weighs on USD, regardless of what’s priced in (-90bp by end-2020).”
“We see cuts as largely pre-emptive though, underwriting the expansion and thus leaving intact the USD’s superior growth and yield credentials in 2020.”