FLASH: Last week, Fed Chairman Powell said, “…we will act as appropriate to sustain the expansion.”
With those few words Chairman Powell took the strength out of the argument for a recession because the Fed is very powerful. And with the stock market rallying, President Trump threatening more tariffs on China, stocks are just off of their all-time highs.
Trade disputes, BREXIT, European elections, UK elections seem non-events because the Fed and interest rates drive the price action in the financial markets.
Ah but the ECB said it is considering raising rates in Y 2020, but when coupled with Chairman Powell’s dovish tone, it flipped the divergence in monetary policy between the less-hawkish Fed and the dovish European Central Bank to dovish Fed and less-dovish ECB, and the Key reason the EUR/USD rallied.
The main reason for the plunge in .DXY is because the EUR makes up about 57% of the index. So when EUR jumps up like it did last week, .DXY gets hammered.
The Big Q: Does it represent a weaker USD trend, or a mathematical anomaly?
The Big A: We will see at about 1.1450. Currently EURUSD is trading at 1.1329
On the sharp downturn of the NFPs, the market expectations is now for the FOMC to deliver say 3 rate cuts this year. Add to that the ISM manufacturing marked its lowest mark in May since October 2016 and regional Fed surveys of factories have been mixed.
Last week, the ISM survey of the services sector, which comprises 70% of the US economy, beat expectations in May. Additionally, the unemployment rate remains at the 50-yr low of 3.6%.
So, if the Fed’s decision this coming week is going to be data dependent, it will not only consider inflation and employment, but also the consumer. And for that matter a wide range of indicators such as household expectations, capital investment and surveys of business conditions. Policymakers will also be looking closely at the impact of the tariffs.
That begs the Q: Are they weakening the economy, and at the same time driving up inflation.