The US Dollar (USD) has advanced further in the FX markets and after the biggest gain on Monday (1.0%) since mid-May, the dollar has advanced by a further modest 0.25%. As stated here already this week, there is a shift in focus underway with tariff risks receding for now and the 1st August no longer seen as a key risk-event day, and the focus shifting to relative macro with the FOMC this evening and the jobs data on Friday. The JOLTS report continued to point to a labour market that may be weakening but is certainly not deteriorating in a marked fashion that warrants a shift in monetary stance by the Fed, MUFG’s FX analysts Derek Halpenny and Abdul-Ahad Lockhart report.
Powell may have to keep his options open for September
“Fed Chair Powell is of course in a tricky position and his press conference will be dissected for evidence of him being influenced by the blatant criticism from President Trump and the pressure to cut. But it is important to note that this time there seems likely to be greater pressure from within the FOMC to cut. Centrist FOMC members may be concluding that while there has been no compelling information one way or the other on the labour market or inflation, you can’t wait forever and there comes a point when a cut could be justified. Given the uncertainties over inflation are likely to persist through the remainder of the year waiting to assess the damage could do more harm than good given the monetary stance remains restrictive.”
“The median dot profile is close call on two cuts. Seven FOMC members are expecting no rate cuts with two expecting just one. Eight expect two cuts and two expect three cuts. That could easily drop to one in September with no rate cut delivered. The big issue for the FOMC to determine is whether waiting longer to assess inflation risks is damaging or not and the labour market doesn’t scream weakness that is anything other than gradual. The S&P 500 at a record high also does not scream the need for monetary easing at this juncture. The lag on tariffs hitting the hard inflation data is certainly a justifiable risk to wait longer.”
“The key tonight is that Powell will have to keep his options open for September. There will be NFP and CPI reports before the September FOMC and while the uncertainties over tariffs impacting inflation will still exist then, if inflation has remained broadly stable by then and the jobs market hasn’t weakened, the FOMC will cut. While that outcome is still very unclear, getting positioned for possibly cut does suggest Powell tonight will make clear it’s an option dependent on certain outcomes. That could well bring to a halt the positive dollar momentum we have seen so far this week.”
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