Powell's power-play: The Good, the Bad, and the Ugly – USD may gain on uncertainty

The Good

The labor market is robust: Powell has repeated the message in the statement – the labor market is doing well. He added that the Fed is focusing on three-month or six-month averages and not on a single figure. All in all, May's job report is not that worrying.

Growth is satisfactory: The Fed Chair has also addressed the recent upbeat retail sales number and generally upbeat consumer confidence. These point to robust growth this year and nothing to be worried about.

The Bad

Notable fall in inflation: His comments on inflation have markedly changed. Back in May, he said that weak price development in the first quarter was "transitory" and now he has expressed concern. That is clearly a dovish sign.

Trade risks have grown: Powell may have stated the obvious. The Fed's last decision was held on May 1st and President Donald Trump's tweets about new tariffs on China came on May 5th. Trump has announced a meeting with his Chinese counterpart Xi Jinping only on June 18th – but trade tensions during these six weeks have taken their toll and triggered a change in tone by the Fed.

The Ugly

Growing risks for the outlook: Trade and inflation concerns do not amount to a dark outlook – but only to "growing uncertainties." This language is more nuanced and leaves some investors scratching their heads. Is this the first step before announcing a rate cut? Or is the Fed only noting worries that may or may materialize? Powell's words – like the statement – were somewhat murky. 

Waiting for more data in the near term: The Fed may have dropped the word "patience" from its jargon but it practices patience – at least for now. Using "near term" goes hand in hand with "closely monitoring" but that is far from making a clear commitment. 

Conclusion

The Fed has undoubtedly gone dovish by expressing concern and opening the door to cutting interest rates. However, markets have been pricing in a rate cut in July – and that is far from certain. 

A lot hinges on the Trump-Xi Summit. If it results in smiles and a resumption of talks, the Fed may refrain from action and continue monitoring.

Yet if the meeting breaks up and Trump slaps new duties on the second-largest economy, the Fed may feel forced to act and even signal further cuts.

In the short term, Powell's message probably fell short of market expectaitons – leaving room for the US dollar to pare its losses.