Has the time of finally been called for US dollar outperformance? We discuss the implications of recent moves impacting on forex markets, equities and commodities. What is the outlook for the coming days and the key factors to watch?
Traders could be forgiven for asking themselves whether Jerome Powell is the head of the Federal Reserve or the head of the World Central Bank? The Fed chair’s Congressional testimony was littered with caution, mostly concerning the impact of a global economic slowdown infecting the US. However, stepping back, the US economy is running at c. 2% to 2.5% GDP in 2019. Core inflation is a little subdued but is not falling sharply below the target. The labor market is solid with unemployment at record lows and Non-farm Payrolls running a 12 month average of 185,000. Real wage growth is over 1%, and yet “many” on the FOMC are considering more accommodative monetary policy. The Federal Reserve is in retreat at the first sign of trouble, heading for the hills. Pressures of trade disputes/protectionism/nationalism are slowing the global economy and the Fed may just be proved right in time to make an insurance cut. But how many beyond there? US core CPI ticked higher to 2.1% last week, whilst the focus will be on Michigan Sentiment this Friday. What is interesting though is that the Dollar Index peaked at 98.37 in late May just prior to pricing for Fed rate cuts. Since then it has posted a couple of lower highs and another potential lower high on Powell’s testimony. Effectively, it looks as though the dollar has peaked for 2019 and taken over a near six month basis looks to be ranging. Whilst the US economy is the best of a bad bunch, with Jerome Powell now acting as the pseudo head of the Global Central Bank, the dollar outperformance could be at an end.