This week the US dollar seems to be depreciating due to a number of factors that are moving in one direction. Direction of interest rate cuts already this month, which may be reflected in USD weakness.
After the dovish testimony of the Federal Reserve chairman in Congress, which increased the chances of interest rate cuts, we also saw that consumer inflation in the United States in June fell to 1.6 percent from 1.8 percent in May, which was in line with market expectations, but at the same time it was the lowest inflation in four months. The increase in food prices slowed down to 1.9 percent from 2 percent a month earlier, and energy prices dropped by 3.4 percent, while in the previous month the decline was 0.5 percent. The cost of gasoline decreased by 5.4 percent, and diesel fuel decreased by 5.6 percent. In turn, core inflation rose from 2 to 2.1 percent, but this did not stop the market from further discounting interest rate cuts in July.
Investors are 100 percent convinced that the US Federal Reserve will lower the cost of money at the meeting, which will end on July 31. With 21 percent probability, the market expects a cut by half a percentage point, and with 79 percent gives a chance to cut rates by a quarter of a percentage point. Therefore, it can be said that the higher-than-expected reading of core inflation significantly reduced the chances of cutting by 50 basis points.
Meanwhile, the FX options market, where expected volatility is calculated, does not seem to excite neither the Fed meeting with the decision on the last day of July, nor the meeting of the European Central Bank on July 25. This is when the ECB may already lower interest rates or announce further actions to prepare the market for further monetary policy easing. Nevertheless, the global stimulation of the economy by central banks has a calming effect on the market. The expected monthly volatility for the EUR/USD pair fell yesterday to 4.76 percent, which is the lowest since May.
It seems, therefore, that the second half of July, and especially the end of the month, may be the most interesting in terms of decisions and market reactions, which for the time being seem quite calm.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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