Credit Agricole's head of G10 FX research and strategy, Valentin Marinov, spoke to Bloomberg earlier
- Current Fed pause will likely stretch on for few more quarters
- Believes that the Fed tightening cycle has peaked
- Fed likely to communicate such policy stance ahead of time
- That will result in a weaker dollar alongside fading yield momentum
- Any softening in policy stance by the Fed will be welcome by Trump
- There shouldn't be any real scope for more conflict between Trump and the Fed
- A bit of a stretch to assume that eventually POTUS will be able to determine the course of US monetary policy
The rate cut view isn't exactly much of a surprise as market participants are also pricing in a higher likelihood of a rate cut by the Fed than a rate hike for this year. Unless the global economy manages to upstage current expectations, it's hard to see the Fed bucking the trend and putting more pressure on itself over the coming quarters - especially with inflation not really at risk of overshooting.
During the interview, Valentin also speaks about EUR/USD and why he feels that the pair may see further support down the road should the Fed start communicating a rate cut message to markets. More specifically, he talks about it in context with the chart below:
The box spread above basically highlights the "arbitrage" (I can't think of a better term to fit in here) that investors are able to capitalise on when comparing the yield curve momentum of the US and Eurozone. It basically shows an upwards slope which favours the latter and essentially says that the US yield curve is doing much worse than the Eurozone as a whole.
For me, it's not something I particularly care too much and I reckon most spot currency traders wouldn't either. Net yields differential matter more to spot currency traders in my view and as long as the advantage continues to reside in the US, it's hard to believe that traders would just abandon the dollar all of a sudden considering that the rest of the world isn't faring that much better currently.