By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – The buck continued to take a battering yesterday, as metals gained ground once more, and stocks printed new record highs. Today, the first FOMC decision of the year, as well as a handful of megacap earnings, highlight the calendar.
WHERE WE STAND – The ‘bye America’ trade remained the main theme of the G10 FX complex yesterday, with the buck continuing to soften across the board, hitting its weakest since March 2022 per the BBDXY.
At this stage, the reasons for this USD downside are well-known, as participants in the rest of the world continue to trim exposure to US assets, in reflection not only of the increased policy volatility that continues to emanate on the trade front from Washington DC, but also amid speculation that the Trump Admin might be pursuing what one could reasonably call a ‘less strong dollar’ policy, spurred on by those NY Fed rate checks in USD/JPY last week, as well as comments from Trump himself yesterday.
In said remarks, Trump noted that the dollar is ‘doing great’ and that he doesn’t believe it has declined ‘too much’, while also noting it to be ‘fair’ that the buck is seeking its ‘own level’. Altogether, that, to me, suggests that the Administration are happy with the USD continuing to weaken, and in fact are seeking to engineer such an outcome, considering that jawboning on Trump’s part. In a similar manner to how we often say ‘don’t fight the Fed’, it would also be very very unwise to try and ‘fight the President’, so this simply reinforces the bearish USD trend that was already pretty well-established.
That momentum stepped up a gear yesterday, with a number of key levels breaking down across the G10 board – the EUR rose above 1.20 for the first time since 2021, USD/JPY traded back down towards the 152 mark, while cable popped above the 1.38 handle for the first time in five years. I wonder how long it’ll take for Chancellor Reeves to claim credit for that latter move…
I jest, of course! But, more seriously, despite what remains a very robust stateside economic backdrop, where growth should considerably outperform that of DM peers this year, the near-term balance of risks does continue to point towards further USD downside in my mind. Put simply, participants are not only unable to focus on that backdrop given the tariff noise, but also should most definitely not be focused on it when the President seems to be actively engineering a weaker buck. For now, the dollar should continue to grind lower, with any rallies likely selling opportunities.
Elsewhere, both gold and silver rallied again yesterday, though the latter did fail to break above the $117/oz high printed on Monday, with intraday volatility remaining especially elevated. Still, the bull case here is still a very robust one indeed, though the risk of a punchy momentum unwind also still lingers, considering the somewhat parabolic nature of recent gains. Any decent dips, though, should be viewed as buying opportunities.
On the subject of ‘things that just go up every day’, stocks on Wall St are very much in that mood once again, with the S&P closing at a record high yesterday. Tonight’s megacap earnings are obviously a key risk, but with earnings growth largely solid, the underlying economy robust, and the monetary/fiscal backdrops growing looser as the year progresses, I see little reason to believe that the ‘path of least resistance’ leads in any direction other than towards further gains at this moment in time.
Finally, I realise I haven’t mentioned Treasuries much this week. That’s, frankly, because not much has happened in the space, with this week’s 2- and 5-year supply being taken down relatively well, and with price action somewhat muted. That said, it does look as if 4.20% in the benchmark 10-year, and 4.80% in the benchmark 30-year have become yield floors, as opposed to acting as ceilings like they did earlier in the year. If that remains the case after the FOMC today, it would argue in favour of shorts maintaining control, and again tilt the balance back towards a steeper curve, which feeds into the broader ‘run it hotter’ approach that policymakers are taking when it comes to the US economy.
LOOK AHEAD – Today is ‘Fed day’, as well as ‘megacap earnings day’, which means it’ll be an incredibly hectic one for participants everywhere.
On the Fed, I’d argue that tonight’s FOMC decision will probably be a bit of a non-event. The Committee will maintain the target range for the fed funds rate at 3.50% – 3.75%, pausing to take stock of the impact that the three 25bp cuts delivered at the tail end of last year have had on the economy, in light of tentative signs that the labour market may well be stabilising.
Still, Powell & Co will signal that the direction of travel for rates remains lower, though the timing of those additional cuts is likely to hinge on further signs of labour market weakness emerging, or a return closer to the 2% inflation target later in the year. The Chair himself, meanwhile, is unlikely to make any explicit comments as to his future post-May, or regarding ongoing efforts to erode the Fed’s policy independence, beyond the prepared statement issued a few weeks ago in the aftermath of the DoJ subpoenas.
Turning to the earnings docket, Microsoft (MSFT), Meta (META), and Tesla (TSLA) are all set to report on the closing bell, combined comprising over 10% of the SPX by market cap. Given that, as well as the generally pivotal nature of the AI theme, tonight’s reports stand as probably the biggest near-term event risk for markets to navigate, with investors looking not only for top- and bottom-line beats, but also guidance upgrades and bullish C-suite commentary in order to unlock post-earnings upside. Given still-stretched valuations, and how many corners of the market are ‘priced to perfection’, participants are unlikely to be particularly forgiving in the event of any downside surprises.