The US labor market report for July has thrown a spanner within the works, dashing my hypothesis that the Fed may not reduce rates of interest in September in any case. Now it appears to be like extra probably than ever. Between now and the subsequent Fed assembly on September 17, there may be nonetheless one labor market report and two inflation experiences to return. In fact, something can occur – particularly on the inflation entrance if the tariffs lastly come into pressure this week. Nevertheless, it’s unlikely that the subsequent labor market report will likely be surprisingly good, and additionally it is uncertain that the tariffs can have a major affect on inflation so quickly after they arrive into pressure. This may make the arguments in favor of an rate of interest reduce in September overwhelming, Commerzbank’s FX analyst Antje Praefcke notes.
Draw back dangers for the greenback clearly dominate at current
“To make issues worse, US President Trump continues to massively erode confidence within the selections of the US administration. If a labor market determine does not match, the pinnacle of the BLS is solely fired. In fact, one can at all times argue concerning the assortment, evaluation, and interpretation of information. However such actions are likely to smack of “if it does not match, make it match” and additional undermine the credibility of statistics and knowledge units. I might similar to to recall related incidents in Turkey prior to now.”
“As well as, the personnel modifications within the Board of Governors might now shift extra shortly in favor of a extra dovish Fed, in keeping with Trump’s calls for, after Ms. Kugler introduced her early retirement. Another vote on the board doesn’t essentially imply a direct rate of interest reduce, as there are a complete of seven board members and 5 regional central financial institution presidents who’re eligible to vote. Nonetheless, with the nomination of a suitably loyal candidate – particularly in view of the most recent labor market knowledge, see above – the Fed is prone to turn into extra inclined to chop rates of interest. Or there may very well be inner energy struggles throughout the FOMC, which the market would definitely view critically.”
“All in all, subsequently, these will not be excellent news however moderately bitter capsules for the greenback, particularly if different macroeconomic knowledge additionally deteriorates noticeably and the arguments in favor of rate of interest cuts turn into stronger. The one hope for a potential correction then stays the US inventory markets. In the event that they collapse, Trump might take countermeasures to calm traders’ heated tempers, a minimum of partially and for a short while. Nevertheless, the draw back dangers for the greenback clearly dominate at current.”
