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The USD Index (DXY) recovered by 0.4% to 99.6 after three days of selling. The futures market pared bets for the US Federal Reserve to cut interest rates in June and July on its wait-and-see approach. Except for a two-day dip to 98 on April 21-22, the DXY has been consolidating in a 99-100.4 range in the past 3-4 weeks. The FOMC left the Fed Funds Rate unchanged at 4.50% for the third consecutive meeting. In line with our expectations, the Fed looked past the negative headline growth in 1Q25 GDP and took comfort in the continued expansion in consumer spending and private investment. Fed Chair Jerome Powell acknowledged increased risks to both sides of the dual mandate(maximum employment and price stability) from high uncertainty over the Trump administration’s significant changes across four areas – trade, immigration, fiscal policy, and regulation. Trade policy – tariffs and trade talks – is still unfolding with ongoing tensions with major trading partners reshaping global supply chains and weighing on sentiment. The push to finalize Trump’s tax reform package this summer is starting to take form and will be followed by an agenda to deregulate the financial sector. The Fed will remain patient until there is greater clarity on which side of the mandate is more at risk from Trump’s policies.
GBP/USD depreciated by 0.6% to 1.3292 in anticipation of a 25 bps cut to 4.25% at today’s Bank of England meeting. The expectation was driven by BOE Governor Andrew Bailey’s warning a fortnight ago about a growth shock resulting from US trade policies. UK’s CPI inflation also eased to 2.6% YoY in March from 2.8% in February; core eased to 3.4% from 3.5%. The OIS market is looking for a dovish tone to affirm another three cuts in June, September, and November. However, the BOE may disappoint market participants expecting a softening in its “gradual and careful” guidance. Bailey did not think the UK economy was close to a recession, and inflation remained above the official 2% target. Senior UK trade negotiators have arrived in Washington to step up efforts to sign a trade deal with the US (that mitigates US tariffs on UK goods) before the EU-UK annual summit in London on May 19. Hence, GBP/USD will likely remain in the 1.3250-1.3450 range held since April 18.
Quote of the Day
“An eye for an eye only ends up making the whole world blind.”
Mahatma Gandhi
May 8 in history
Mahatma Gandhi started his historical 21-day fast in 1933.
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