USD: Bracing for more trade headlines
FX markets start the week in a calm fashion. Investors are keeping one eye on trade news, where Wednesday sees the expiry of the 90-day reprieve on those high 'Liberation Day' tariffs. Since April, FX volatility has fallen as Washington has shown itself more interested in cutting deals than pursuing tariffs for ideological goals. Where do we stand on trade? We have deals for the UK and Vietnam. We have a truce with China, and for the rest, it is a question of whether last-minute deals are struck, whether tariffs are substantially increased or whether fresh extensions are announced. All seem possible. Probably the most focus this week will be on the major trading blocs such as the EU and Asia, where most of the US trade imbalances stem from.
Threats of a resumption of 50% tariff levels could briefly hit the benign risk environment, although with a market already positioned underweight the dollar, the dollar might not have too far to fall. And equally, last week's US macro data was mildly dollar supportive. Here, US yields have held onto their 10-12bp rise across the curve on the view that the Federal Reserve doesn't need to be rushed into a July rate cut after all.
Away from trade, it is a quiet week for US data and there may be some more focus on the Fed in light of the release of the minutes from the June FOMC meeting. There's also a focus on the energy market today, where the OPEC+ decision to increase supply more than expected should keep crude under pressure. Our team forecasts Brent dropping to $60/bl later this year, which would be good news for global growth and good news for the energy importers in Asia and Europe.
DXY has found support around 96.50, and could be due some consolidation this week.
