DXY Index had a lacklustre session on Wednesday, trading sideways within a narrow 97.45-97.75 range. First, there were no surprises from the FOMC Minutes for the June 17-18 meeting. With many Fed officials expecting tariff-driven inflation in the coming months, markets did not revive bets for a rate cut at the upcoming July 30 FOMC meeting. Next week, consensus expects CPI inflation to rise to 2.7% YoY (0.3% MoM) in June from 2.4% YoY (0.1% MoM) in May and core inflation to increase to 3% YoY (0.3% MoM) from 2.8% YoY (0.1% MoM).
However, the US Treasury 10Y yields eased for the first time in six sessions by 6.7 bps to 4.33%. Players took heart from the FOMC minutes that Fed cuts were possible later in the year if the impact of tariffs on inflation proved temporary, as indicated by the steady readings in the New York Fed’s inflation expectations across the 1Y, 3Y, and 5Y horizons. The futures market is keeping the door open for a 25 bps cut in September.
Second, the seven tariff letters that US President Donald Trump sent were to emerging market countries, not the countries in the DXY. For example, the Brazilian real sank 2.3% following Trump’s threat to slap with a 50% tariff on the country without a trade deal by the new August 1 deadline. Southeast Asian currencies also depreciated but at a slower pace from the letters sent a day earlier – THB, PHP, and MYR depreciated by 0.5%, 0.4%, and 0.2%, respectively.
Investors calmed after taking equities lower on Monday and Tuesday. The S&P recovered by 0.6% to 6263 overnight while the VIX volatility Index fell to 15.9, its lowest level since February. Investors shrugged off Trump’s warning that there would be no tariff extension beyond the August 1 deadline as trade rhetoric. With the Court of International Trade’s (CIT) legal case against Trump’s IEEPA-related tariffs unresolved and a key hearing scheduled for July 31, the actual enforcement remains uncertain. Although currencies are rising again this morning, we remain wary of Trump’s threat to impose a 200% tariff on the pharmaceutical sector under a Section 232 national security investigation that falls outside the scope of the CIT. This could impact the EUR, CHF, SGD, and AUD.
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July 10 in history
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