Fed Quick Analysis: Strong and stable summer sailing USD now moves to watching trade
- The Fed left rates unchanged and made minimal positive changes to the language.
- Powell and co. will likely raise rates in September.
- Comments on trade will wait for the Minutes, and also for Trump.
The FOMC unanimously decided to leave interest rates unchanged at a range between 1.75% to 2.00%. There were no surprises there. The changes were also minimal, but still worth mentioning.
The description of the economy changed from "solid" in the previous statement to "strong" now. This is a nod to the recent GDP growth data that showed an annualized growth rate of 4.1% in Q2 2018, the best in four years.
Another positive upgrade is the description of inflation. 12-month inflation 'remains near' 2% versus 'moved close to' 2% in the previous statement and this is an acknowledgment of the fact that Core PCE has been around the 2% target for some time.
These minimal changes did not boost the US Dollar that was already on the rise against most currencies ahead of the publication. The greenback remained steady, and so did odds for a rate hike in September, which are stable at 80%.
Trade Elephant
The big elephant in the room is the state of trade relations with the world. The Fed did have its say in the past. The meeting minutes contained language that showed some concern about trade, mostly echoing business contacts. Fed Chair Jerome Powell mentioned these worries in the past two post-rate press conferences and also in his testimonies.
However, the Fed is not worried enough to include it in the official statement, which is more politically sensitive.
Before that upcoming September meeting, we will get some news on about new tariffs on China. The White House intends to impose 25% tariffs on no less than $200 billion worth of Chinese goods. If negotiations fail and the US goes ahead, the duties will come into effect on August 30th.
Such a move would be a major escalation in the trade wars. It may not stop the Fed hike but may alter the path moving forward.
Any news on the trade front will not only move the Fed but also the US Dollar, that does not wait for the central bank to move.
But at the moment, in mid-summer, the Fed looks at the economy and likes what it sees.
Author
Yohay Elam
FXStreet
Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.
