US Dollar (USD) is drifting lower against all major currencies with the DXY index hitting a seven-month low. Money market expectations for an aggressive Fed easing cycle and the modest improvement in financial market risk appetite, reflected by the recovery in global equity markets, are weighing on USD, BBH FX strategisys note.

Fed platemakers ready to talk

“Fed funds futures are still pricing-in about 100bps of easing by year-end. In our view, the encouraging US macro backdrop of solid domestic demand activity and moderate disinflation suggests the Fed is unlikely to cut the funds rate as much as is currently priced-in. As such, there is room for an upward reassessment in Fed funds rate expectations in favour of USD and Treasury yields.” 

“San Francisco Fed President Mary Daly (FOMC voter) emphasised the need for gradual interest rate cuts, pointing out the US economy is ‘not in an urgent place’ and the labor market was ‘not weak’. Daly added ‘gradualism is not weak, it’s not slow, it’s not behind, it’s just prudent’.”