If Powell is Hawkish Where are the Trades?

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Market Drivers July 10, 2019
French IP beats
All eyes on Powell
Nikkei -0.15% Dax -0.21%
UST 10Y 2.097%
Oil $58/bbl
Gold $1391/oz.

Europe and Asia:
EUR FR IP 2.1% vs. 0.3%
GBP UK Trade Balance -11.5B vs -12.5B
GBP UK GDP 0.3% vs. 0.3%

North America:
USD Powell Testifies to House 10:00
CAD BOC Rate Decision 10:00
USD FOMC Minutes 14:00

FX markets were generally quiet ahead of key testimony to Congress from Fed Chair Jerome Powell later today.

The dollar remained bid with USDJPY hovering just below the 109.00 figure aided by a rise in US rates which climbed to within a whisker of the key 2.10% level on the 10-year bond. The markets have given up all expectation of a 50bp cut in July and the default assumption is that the Fed will cut 25bp at the end of the month and will then remain in wait and see mode before acting again.

The more hawkish tilt by the Fed is likely to push USDJPY and USDCHF higher but EURUSD so far has remained surprisingly resilient holding the 1.1200 figure after a flush lower yesterday. One key support in today’s trade was the surprising rebound in French Industrial Production which popped 2.1% versus 0.3% eyed indicating that manufacturing demand in the region may be stabilizing. That, in turn, could lead to ECB holding steady for now which will provide support for euro at the current levels.

Meanwhile, a hawkish tilt by the Fed will likely have the biggest negative impact on the comm dollars with Aussie and kiwi particularly vulnerable as interest rate differentials will weigh on the exchange rate. Ahead of the testimony both Aussie and kiwi lagged the majors and that trend could become even stronger if Powell suggests that the Fed will follow a one and done script.

Lastly, today the market will also see the BOC rate decision and presser. Given the surprising strength of the Canadian economy, the consensus view is that BOC will keep rates steady. So it North American monetary authorities remain relatively hawkish today both the greenback and the loonie will outperform as the day proceeds.

Boris Schlossberg
Managing Director

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