EURUSD May Rise if Sentiment Data Amplifies Fed Rate Cut Bets

EURUSD, UNIVERSITY OF MICHIGAN SENTIMENT, FED RATE CUT EXPECTATIONS– TALKING POINTS

• EURUSD may rise if U. of Mich. sentiment data undershoots
• Fed’s Williams boosted the pair’s rise after dovish comments
• Central bank rate cut bets continuing to pressure US Dollar

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CLARITY IS KEY: FED’S WILLIAMS COMMENTARY, U. OF MICH. SENTIMENT DATA

In the absence of other high-profile economic data, EURUSD traders will likely divert their attention to the publication of preliminary University of Michigan sentiment data. The report is expected to show a 98.8 print, slightly higher than the previous 98.2 publication. If it undershoots, it would likely fuel what are already-aggressive rate cut expectations from the Fed, with markets now pricing in a slightly lower-than-even odds of a 50 bp cut this month.

What is worrisome is the high bar markets have set for the central bank. If the Fed fulfills the wish of market participants and does indeed slash rates by 50 bp, that leaves little room for upside momentum because that much seems to have already been priced into asset values. Conversely, if the central bank only cuts rates once, investors may panic because the Fed’s policy decision is less dovish – or relatively more hawkish – than expectations.

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Towards the end of Thursday’s trading session, Federal Reserve Bank of New York President John Williams peppered financial markets with dovish rhetoric with statements of him seeing the current estimate for neutral rates at 0.5 percent. Furthermore, he also stressed the need for the central bank to “act quickly” – when it came to cutting rates – at the first sign of economic distress.

Then, the loquacious Fed member threw a curveball by announcing that the commentary was not about “potential policy action” but rather academic ruminations. Markets promptly reacted with a flood of capital pouring into the US Dollar while crosses with the Greenback suffered. Expect volatility like today – and likely higher – next week with the ECB rate decision and publication of US Q2 GDP data.

CHART OF THE DAY: US DOLLAR CROSSES PLUMMET AFTER FED’S WILLIAMS PIVOTS

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--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitri on Twitter