3 reasons why the USD can recover after the Fed’s blow

Jun 19,2019 19:35   Source:Forex Crunch
  • The Federal Reserve has left rates unchanged but downgraded its language. 
  • There are three reasons why the USD retreated on the news.
  • But there are also three factors that could send it back up.

The Federal Reserve has left the interest rates unchanged as broadly expected but has also made significant changes that open the door to a rate cut. But is it enough to satisfy markets?

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Let’s begin by explaining the three reasons why the dollar dipped and then describe why it is not dovish enough.

1) Patience: The Fed has scrapped the word “patience” that it has been repeating since the wake of 2019. The central bank is no longer sitting on the fence but will “closely monitor” developments, thus opening the door to rate cuts.

2) Growing uncertainties: The Fed has placed global worries on the front page and not only in its meeting minutes. The wording shows that officials are genuinely worried.

3) Dovish dissenter: James Bullard, President of the Saint Louis Fed, has voted for a rate cut. Dissents are not common under Powell and Bullard’s coming out points to growing pressures for reducing rates.

However, there are three developments that make the development not that dovish:

Three reasons for a greenback comeback

1) Dot plot: The Fed’s projections do not point to a rate cut in 2019. This significantly contradicts market expectations for two rate cuts in 2019. The Washington-based institution may eventually change the dot-plot and cut rates – but we’re not there yet.

2) Inflation: The Fed has maintained the wording that “survey-based measures of longer-term inflation expectations are little changed.” They seem unmoved by the slowdown in the consumer price index. Inflation is one of the Fed’s mandates.

3) Strong labor market: The bank notes that “the labor market remains strong” shrugging off the unimpressive job gains recorded in May and seeing a brighter picture. They add that “Job gains have been solid.” Employment is the Fed’s second mandate and once again – this is far from being sufficient for a rate cut.

The post 3 reasons why the USD can recover after the Fed’s blow appeared first on Forex Crunch.



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