Central Bank Weekly Talking Points:
- With the US-China trade war back in a state of détente – China is now saying that they will not escalate further, and they expect the US to deescalate – US Treasury yields have turned higher, provoking the US Dollar (via the DXY[1] Index) into a bullish breakout attempt.
- Fed funds are pricing in an 100% chance of a 25-bps rate cut in September and a 85% chance of 50-bps of rate cuts by the end of the year. Meanwhile, Eurodollar contracts are only pricing in a 31% chance of 50-bps of rate cuts by the end of 2019.
- Retail traders are turning more bearish on the US Dollar despite gains in recent days.[2]
Looking for longer-term forecasts on the US Dollar? Check out the DailyFX Trading Guides.[3]
Global financial markets are taking another spin around the ‘trade war news cycle.’ As we’ve previously noted, the cycle goes: (1) Trump administration is tough on China; (2) financial markets sell off on trade war concerns; (3) Trump administration hints at US-China trade deal; (4) financial markets rally on trade deal hopes; (5) No deal materializes.
Now that US President Trump has indicated he is having “second thoughts” on escalating the trade war further, and that China is now saying that they will not escalate furtherand they expect the US to deescalate, it now appears that financial markets are firmly in stage (4). In previous spins through the trade war news cycle, stage (4) has been accompanied by higher US equities, higher US Treasury yields, and a stronger US Dollar. The driving factor behind all of these moves remains Fed rate cut odds.
US Treasury Yield Curve Remains Inverted
Now that
