The US dollar ended the first week of July in positive territory. Strong enough Nonfarm returned to the dollar bulls the hope of tightening the rhetoric of Fed members and, accordingly, changing plans for easing monetary policy. The demand for the US currency increased and the greenback changed the configuration of the main currency pairs in just a few hours of Friday.
Of course, the published data on the labor market against the backdrop of a truce with China made it possible for investors to expect certain changes. The evidence of this causal link "captivates" so the dollar can grow by inertia on Monday. But despite all the above factors, a further rally in the greenback is a big question. Certain signs suggest that the Fed will not back down on its intentions, even after the release of strong Nonfarm and political events in Osaka. Like it or not, we will know in a day, namely on Tuesday.
The central event of the coming week is the speech of Jerome Powell before the congressmen, where he will announce the semi-annual report. This is a very important event, which takes place only twice a year. At the beginning of the year, this report was postponed several times due to the prolonged shutdown, therefore the Fed chairman voiced his position before the deputies only at the end of February. This time, the Congress is operating normally, so Powell will communicate with American deputies for two days (Tuesday and Thursday), discussing with them the economic prospects of the country and the prospects of monetary policy. In addition to the report itself before the two specialized committees, the head of the Federal Reserve will answer the questions posed. Here it is worth paying attention to several aspects in the context of recent events.
The fact is that the semi-annual report is prepared and submitted to the US Congress a few days before its "official presentation" by the head of the American regulator. In this case, the document was sent to the relevant Congress Committees on Friday, so the market found out about its key theses already at the very finale of the trading week. It is noteworthy that this report includes key messages from the June meeting of the Federal Reserve.
Let me remind you that following this meeting, the likelihood of a rate cut has increased to almost 100%. In the text of the accompanying statement, the regulator has deleted the phrase "patience". This formulation meant that the Fed is ready to take a wait-and-see attitude, maintaining the status quo for the foreseeable future. Eliminating this phrase from the final communique, the US central bank warned that it was preparing to soften the parameters of monetary policy. The "point forecast" of the Fed confirmed this assumption, however, on this issue, the views of regulator members differed: 8 members of the Fed spoke for the rate cut before the end of this year (7 of them predict two drops), while another 8 were in favor of maintaining the wait-and-see position.
A monetary policy report released Friday said that Fed members generally did not change their minds about monetary policy prospects. The regulator is still dissatisfied with the growth rate of the US economy (including in the second quarter) and the slowdown in inflation rates. Contrary to the growth of consumer spending, the volume of business investment declined, while indicators of the export sector and production orders turned out to be in a completely negative area. The Fed does not deny that all this is a consequence of the trade war with China. Regulator members explained that the introduction of additional duties led to a significant drop in both import volumes and export volumes in the United States. The general growth of uncertainty about the prospects for the White House's trade policy forced the American business sector to reduce investment, and this fact had a negative effect on the country's investment climate. In addition, the report indicates another alarming signal: the decline in global sales of technology products. This fact has limited trade and production activity, especially in Asian emerging markets.
According to Fed members, the dynamics of growth of inflation indicators is also alarming. Core inflation is below the target level, although many members of the regulator are still confident that this trend is temporary and price pressure will increase by the end of the year. Nevertheless, the figures speak for themselves: according to the latest data, in annual terms, the index came out at a two-percent level, although experts expected growth to 2.1%. The index went below this value only in February last year. The general consumer price index was also in the "red zone" - both in annual and monthly terms. In May, the consumer price index rose by only 0.1% m/m and 1.8% y/y, while analysts expected to see CPI at 0.2% and 1.9%, respectively. In other words, inflationary dynamics rightly causes concern to the Fed.
Thus, the US Federal Reserve's semi-annual report shows the continuing intentions of the regulator to lower the interest rate in the near future. But the snag is that this report was prepared before the release of fairly strong data on the US labor market. Whether the Nonfarm influenced the position of the Fed in general and Jerome Powell in particular is an open question.
Therefore, the two-day speech of the head of the Federal Reserve in the Congress now has a particularly important role. If he focuses his attention on the uncertainty about US-China trade relations, as well as on the slowdown of many economic indicators, the dollar will collapse across the entire market as rapidly as it rose at the end of last week. But if Powell declares the expediency of maintaining a wait-and-see position, the greenback will continue its rally, and together with the euro will head towards the 10th figure. This scenario also has a reverse side - in this case, the White House may trigger available tools to weaken the dollar (using, for example, a stabilization mechanism or compensatory intervention). But, as they say, "this is a completely different story": the initial reaction of the market to Powell's "hawkish" mood will definitely be in favor of the dollar.
In general, the fate of the further rally of the US currency will depend on the Fed's position. The market reaction to the Nonfarm is premature, as the head of the regulator this week may disappoint traders with his dovish rhetoric, despite the success of the US labor market.
The material has been provided by InstaForex Company - www.instaforex.com