Last week, Fed chair Jerome Powell surprised markets by insisting the FOMC wasn’t confident that it had done enough in order to reduce inflation. The yields on US Treasury bonds jumped higher, and the dollar gained strength.
The major greenback pairs have moved towards neutrality, if they are not waiting for a chance to ease. The Fed is once again the most aggressive central bank, driving up the value the dollar. But, the conditionality in Powell’s speech – inflation coming down – puts much more weight on the coming data. If CPI changes are significantly different from what investors expected, this could cause dollar pairs to move as investors re-calibrate their expectations of the Fed.
Put a Fork in It
Despite what Powell stated last Thursday, more than 80% believe that the Fed has stopped raising rates. Markets are now more focused on the Fed’s next move. The consensus is that the third quarter’s blow-out GDP performance is a high-water mark. Fed rates will increase as the Fed expects growth to slow in coming months.
Question is, will inflation be low enough to allow the Fed concessions?. That…