8-3

The ECB cut interest rates again yesterday by 25 bps, and official overnight rates in Europe are now 2.15%. That’s 8 cuts over the last 12 months. Over the same time span, the Fed has cut three times. You would think that dollar rates would be more interesting for investors and therefore the dollar would be stronger than the euro. However, YTD, the Euro, even with the rate cuts, has appreciated roughly 11% against the U.S. dollar. It seems that the deficit and the debt are weighing more on the dollar and US treasuries than the yields. Or said differently: investor will demand much higher yields in order for them to keep investing in dollar denominated assets. The Fed will meet on June 17-18th to determine if the economy needs a rate cut. No action is expected, which will surely provoke a typical Trump response about the Fed being late and not doing enough. Inflation numbers are already aligned with the Fed’ comfort zone, but Powell will likely see a more deteriorated picture before he pulls the trigger.

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