USD Lower Ahead of FOMC Decision

CURRENCY FUTURES

The USD index is lower following weekly jobless claims and construction data as investors await news out of the Fed today. The dollar gained on Tuesday on safe haven demand after initially falling on weak retail and manufacturing data pointing to increased spending and industrial activity.

Euro futures are higher as the dollar slipped. The Eurogroup meeting of eurozone finance ministers will begin on Thursday. The European Central Bank earlier this month lowered its key interest rate to 2% from 2.25%, its eighth cut since June 2024. That followed data showing the annual rate of inflation in the eurozone was 1.9% in May, lower than the ECB’s 2% target. The soft inflation has led some ECB officials to raise signals that the central bank should be done with or near the end of its monetary policy easing cycle. Wages in the eurozone grew at 3.40%, over expectations of a 3.20% growth, although the figures are down from a 4.10% increase the previous quarter and marked the slowest pace of wage growth since Q3 2023.

British pound futures are higher after CPI inflation data showed that inflation eased slightly in the region but still remained well above the Bank of England’s target. Consumer prices rose 3.4% in May compared with a year earlier, down from the 3.5% in April. The decline in inflation is unlikely to change any opinions in the BoE regarding their policy decision on Thursday, where it is widely expected to hold rates steady at 4.25%. The BoE expects inflation to cool by the end of the year and reach its target by early 2027. Investors will watch for signals and commentary on when rates may fall again. Recent data out of the UK has pointed to a slowing economy, with GDP in April contracting -0.30% while unemployment ticked up. Markets are expecting the BoE to cut rates again in September, while some expect a solid chance of an earlier cut in August.

Japanese yen futures are higher after falling for three straight sessions. New data out of Japan showed that exports out of the country fell for the first time in eight months as tariffs began to take their toll on the economy. Exports, the main growth driver for the economy, declined 1.7% in May from a year earlier, compared with April’s 2.0% rise, with exports to the US dropping 11.1%. The Bank of Japan left its benchmark interest rate unchanged Tuesday and also announced that it would slow the pace of its bond-buying reduction after April 2026. The central bank held rates steady at 0.5%, where it has remained since January; BoJ Governor Kazuo Ueda said the bank will consider further interest rate increases when certain economic conditions are met. The bank also reaffirmed its plan to cut Japanese government bond purchases by ¥400 billion each quarter through March 2026. Starting in April 2026, the reduction will shift to ¥200 billion per quarter.

Australian dollar futures strengthened against the dollar as rising geopolitical tensions resulted in demand for the commodity-linked currency. Labor data due Thursday is expected to show 25,000 new jobs and an unemployment rate holding steady around 4.1%. Recent labor data has shown resiliency, casting doubts on a July rate cut from the Reserve Bank of Australia.

INTEREST RATE MARKET FUTURES

Futures are higher across the board as worries about the escalating conflict in the Middle East and US involvement boosted demand for safe-haven assets. Focus will center around the Fed’s decision at 1:00 p.m. CT time today; the Fed is expected to keep rates on hold while investors will be looking for any signals on the Fed’s future rate path. Markets are pricing in a 55% chance of a 25 bps rate cut in September and an 80% chance of 25 bps of cuts by October. The Fed will update its summary of economic projections as well, with investors paying close attention to signals from the bank on the broader economic outlook.

Treasuries were higher Tuesday as the debt securities got a boost from safe haven demand following the ongoing developments in the Israel-Iran conflict. President Trump said he wanted a “real end” to the nuclear dispute with Iran and indicated he may send senior American officials to meet with the Islamic Republic as the Israel-Iran air war rages on.

Market participants will also be paying close attention to the tax and spending bill making its way through the Senate right now, which is set to provide some short-term stimulus but also increase the size of the US debt load over the next decade. The bill would also raise the debt ceiling by $5 trillion and add to expectations that the US Treasury Department would need to increase the size of its bond issuance in order to continue financing the government’s growing debt problem.

Despite a recent rally in the bond market over the last couple of weeks and strong demand at recent Treasury auctions, foreign central banks appear to be quietly trimming their exposure to US debt securities. The New York Fed’s latest ‘custody’ data shows a steady decline in the value of Treasurys and other US securities held on behalf of foreign central banks. Last week’s figures (which are updated weekly) showed a $17.1 billion decline, and the total value of US debt securities – including mortgage-backed bonds – has fallen around $90 billion since March. The moves signal that foreign bank FX reserve managers are cutting exposure to US bonds. Central banks are traditionally stable, long-term holders of Treasurys, and their gradual retreat could make the market more sensitive to other investor flows.

The 10-year Treasury yield is 4.38%, and the 30-year yield is 4.88%. The spread between the two- and 10-year yields fell to 43 bps from 46 bps on Tuesday.

STOCK INDEX FUTURES

Stock index futures are higher but lost strength after mixed economic data came out before the Fed’s policy decision today. Weekly initial jobless claims came in just under expectations, with 245,000 new claims vs. an expected 246,000 and a step below last week’s revised figure of 250,000. Housing starts fell -9.8%, while building permits shrank -2.0% month-over-month in May. The construction industry employs about 11% of the male workforce in the US; any significant drawdown in construction activity should be monitored for potential impacts on the labor market. All major indexes fell Tuesday as fears of an escalating conflict in Iran drove a risk-off sentiment that boosted safe-haven demand for the USD and US Treasurys.

Retail sales in May shrank -0.9% from April, lower than expectations of a -0.5% fall in spending and a falloff from April’s growth of 0.1% as consumers grow anxious over the larger economic picture and look to hold onto their wallets. May sales excluding auto and gas declined -0.1%, showing the drop in sales was largely attributed to consumers laying off auto and gas purchases after splurging in previous months to get ahead of tariffs. Economists had expected a 0.3% rise. Many businesses stockpiled items to get ahead of Trump’s tariffs, and price increases are expected to show up later this summer or in the fall.

President Trump said on Tuesday that Japan was being “tough” in trade talks and the European Union has failed to offer a fair deal. Trump also added that pharmaceutical tariffs will be “coming very soon.” Meanwhile, President Trump and Prime Minister Keir Starmer signed a limited trade agreement between the US and UK on Monday, lowering tariffs on British car and aerospace imports. However, tariffs regarding steel and aluminum remain unresolved.

Stock valuations are still relatively high by historical standards; the S&P 500 was trading near 23 times its expected earnings over the next 12 months as of June 13, versus a 10-year average of 18.7 times. The high price-to-earnings ratio is at odds with the current macro environment, which has seen central banks and private companies across the globe cut their growth forecasts due to the still-unfolding consequences of uncertain trade policies.

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