Fed to cut rates in mid-2023

U.S. consumers' longer-term inflation expectations fell from a 14-year high in the June preliminary report, according to the University of Michigan's final June consumer confidence index, potentially reducing the urgency for aggressive rate hikes by the Federal Reserve; overall, 6 The pullback in long-term inflation expectations late in the month was due to a rise in the share of consumers expecting very low inflation over the next few years. About half of consumers in the survey expressed a pessimistic view of the risk of a recession or job losses.

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Despite the Fed's current confidence, having to factor in a recession scenario means policymakers will face strong signals to change their actions and possibly put a rate cut on the agenda in mid-2023 to prevent recession risks rise. The Fed is in a very difficult situation, with markets accusing it of misusing its monetary policy tools and moving slowly in trying to contain inflation. U.S. policymakers are expected to remain very cautious, as soaring inflation has so far shown no signs of peaking, which will prompt the Fed to take more aggressive measures in the near future, although Chairman Powell's tone is slightly calmer and the next few Monthly inflation report will be the main driver of Fed action.

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Russia's "Izvestia" reported that several Russian banks have suspended the opening of savings accounts in dollars and euros, and restricted deposits in dollars and euros. The Bank of Russia noted that it is currently impossible to open foreign currency accounts and that savings accounts in euros and dollars have been unavailable since June 9, and when it will be reinstated is still unknown. Russian banks cannot invest anywhere in dollars and euros because of the increased risk of funds being frozen due to Western sanctions, several Russian banks said.

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Sterling will weaken as markets may be forced to scale back expectations for a rate hike by the Bank of England. The UK forward rate curve appears to be "too aggressive" pricing in rate hikes given evidence that the UK economy is deteriorating. Only one 25bps rate hike is expected in August, with rates peaking at 1.50%, while the UK forward curve still reflects a peak of more than 3%. GBP/USD will fall to 1.15 by the fourth quarter of next year.

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Gold rose on Friday as a retreat in the U.S. dollar and fears of a recession bolstered its safe-haven appeal, but looming interest rate hikes sent the precious metal to a weekly loss. Spot gold was up 0.3% at $1,827.20 an ounce after hitting a one-week low of $1,816.10. The dollar index DXY is now down 0.16%, boosting gold's appeal. There are multiple forces swaying the price of gold, forcing it to remain in a tight trading space. The risk of a recession and signs of a looming slowdown in global growth have prompted inflows into gold as a safe haven.

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According to data released by the U.S. Census Bureau on June 24, local time, new home sales in the United States increased by a seasonally adjusted 10.7% in May. While home sales in the Northeast plummeted 51.1% in May and fell 18.3% in the Midwest, sales in the South rose 12.8% and the West rose 39.3%. In addition, U.S. home prices fell slightly in May after a sharp increase in April. The median sales price for a new home fell to $449,000 from $454,700 in April, and the average sales price fell to $511,400 from $569,500.

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JPMorgan analysts recommend increasing defensive exposure as central bank tightening, lower PMIs and consumer confidence and rising energy prices weigh on sentiment. It is recommended to increase long USD/G-10 high beta currencies and maintain short emerging market currencies; the bank initiated short NZD/JPY as a late-cycle hedge; raised the peak target of USD/JPY to 140, and continued to predict EUR/USD testing parity; EUR/CHF final target changed from 1.02 to 0.92.

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Market analysis suggests that if the Bank of Japan joins the hawkish ranks of global central banks, or the U.S. economy slips into recession, the yen's fair value could support its exchange rate. The yen is now near a 24-year low against the dollar, and the yen’s deviation from its fair value is prominent in the fundamental-based behavioral equilibrium exchange rate model. Although the dollar is currently trading at 135.25 yen, the market estimates the equilibrium level to be at 90.74 yen, which means the yen should be about 49% higher than it is now. Indeed, this year, traders have focused more on trends such as the path of global monetary policy and rising commodity prices than on valuations.