- The US Treasury Secretary noted that there might be more trade deals by September 1st.
- The US is nearing a trade deal with China.
- Trump’s renewed assault on Powell weighed on the dollar.
Currency futures gained on Monday as the dollar extended its slide from last week due to an increase in Fed rate cut expectations. Market participants are more optimistic about trade deals with the US that might allow the Fed to consider earlier rate cuts.
The dollar ended down last week amid several factors, including optimism over likely trade deals with the US. On Friday, the US Treasury Secretary noted that there might be more deals by September 1st. This was a sign that Trump was ready to extend his July 9th deadline on reciprocal tariffs. At the same time, reports from the White House revealed that the US was nearing a trade deal with China.
At the start of their trade war with the US, China placed massive restrictions on the export of rare earths, in retaliation to Trump’s tariffs. However, last week, it became clear that the two countries had signed a deal to speed up approvals of rare earths. The news boosted optimism of progress towards a more lasting trade deal between China and the US.
Trade deals would lift the uncertainty over growth and inflation in the US. Therefore, it would allow the Fed to proceed with lowering borrowing costs. Market participants are now pricing a 91.5% chance of the Fed cutting interest rates in September. It is an increase from 83% a week ago.
Further weakness for the dollar from a renewed assault on Fed Chair Powell. On several occasions last week, Trump expressed his dislike for Powell, saying he was terrible for not cutting interest rates. He also wanted the Chair to resign before his term ends in May.
Furthermore, reports revealed that the US president was considering a replacement for Powell by September or October. The attacks raised concerns about the independence of the Federal Reserve, hurting the dollar.
Dollar Index (Source: Bloomberg)
Nevertheless, market participants viewed Powell’s testimony as dovish. He said the central bank would cut interest rates if inflation does not spike this summer.
This week, traders are focused on US employment figures. The nonfarm payrolls report might show further weakness in the labor market. A softer-than-expected figure will boost expectations for Fed rate cuts, further weighing on the dollar and lifting currency futures.
