USD recoups losses after Fed clarifies Williams and Clarida comments

Summary:

• US dollar gains ground this morning after it slumped on Thursday following dovish comments from Fed’s Williams and Clarida
• The US destroyed an Iranian drone after it approached the USS Boxer (the assault ship)
• Japanese inflation stayed muted in June, the yen down on dollar’s strength

Rollercoaster

The US dollar has seen increased volatility in recent hours on the back of a bag of dovish remarks from Fed’s Williams and Clarida which were clarified by the Federal Reserver thereafter, sending the greenback higher again. Their remarks focused on monetary policy timing suggesting that there is no point in waiting until things get so bad to have a dramatic series of rate cuts. In the eyes of financial markets they said “a 50 bps rate cut is on the table at the Fed’s July meeting”. As a result, stocks moved up while the US dollar along with US bond yields slumped immediately. On top of that, Richard Clarida suggested that the US central bank needed to make a decision based on where it thought the economy might be heading and, importantly, where the risks to the economy were lined up. What happened next that the US dollar reversed? Namely, a New York Fed spokesman clarified that Williams remarks were “an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting.” Moreover, in the Q&A session Williams voiced some concerns about low inflation expectations signalling that they could get anchored too low. In the aftermath of their speeches US money markets priced in 41 bps of monetary easing at the meeting in less than two weeks, which sound ridiculously when we take into account the latest slew of macroeconomic data we have been offered so far this week. Either way, a 25 bps is a done deal and markets seem to seek much more assigning almost 50% odds to see a 50 bps decrease. That makes the Fed task even tougher as they could struggle to take the US dollar down when deliver only a 25 bps rate cut.

The EURUSD has seen a turnaround after the NY Fed clarified comments of Williams. Technically we are still far above the 1.12 handle which seems to be the critical line for bulls. Source: xStation5

US-Iran tensions mount

President Donald Trump said on Thursday that the United States destroyed an Iranian drone that approached the USS Boxer (the assault ship) near the Strait of Hormuz. It could be seen as another signal of escalating military tensions between the two countries. What could be interesting, Iranian Deputy Prime Minister informed this morning that the US might have downed its own drone by mistake. Anyway, the key point here from a financial markets’ standpoint is the fact that the Strait of Hormuz is the critical oil checkpoint - roughly ⅓ of the world’s seaborne crude and fuels passed through the Strait of Hormuz last year, according to Bloomberg data. Brent oil prices are trading 1.6% higher this morning after making a jump right after the headline popped up in the evening yesterday.

Although from a technical point of view Brent prices are unlikely to head higher in the nearest time, further escalating of tensions between the US and Iran may have serious ramifications for the oil market. Under these circumstances oil prices could turn much higher. Source: xStation5

In the other news:

• Japan’s inflation stayed at 0.7% YoY in June, core price growth (ex. fresh food and energy) stayed at 0.5%

• US and Chinese officials held a phone call on Thursday, no date for a possible “face-to-face” meeting has been set yet