Fed Chair Jerome Powell yesterday delivered the first real dovish remarks since the June FOMC. He refused to comment on the timing of cuts but explicitly acknowledged that the past three inflation prints have added to his confidence in returning to target, and continued to signal the jobs market is at an inflection point. We had been highlighting the risk of a dovish shift in Powell’s and other members’ narrative, and investors were already positioned for it. Ultimately, the dollar strengthened yesterday and overnight especially against high-beta currencies, while the more liquid EUR, GBP and JPY were more resilient.
A stronger dollar appears to be driven by rising bets on a Trump presidency following last weekend’s events. The rise in long-dated Treasury yields is a symptom of that, as markets increasingly discount expansive fiscal policy expectations under a second Trump term. If markets continue to grow their Trump bets, there are higher chances of wide pre-emptive positioning in the months into November. This is a scenario where the election event would have a limited market impact if Trump indeed wins, but where the political factor should be felt more clearly via a more resilient dollar despite a softer US macro backdrop this summer.
Now that Powell has acknowledged some inflation optimism, June retail sales out today will offer clues on the activity picture. We have long discussed the material risks of a slowdown in consumer spending as high borrowing costs keep biting and Pandemic-era excess savings are depleted. Expectations are for a drop in the headline month-on-month series but a marginal advance in the ex-auto and gas gauge. The only Fed speaker on the agenda today is Adriana Kugler, who is a dovish-leaning member and could follow recent comments by Austan Goolsbee in signalling rate cuts in the coming months.
The US macro picture and recent dovish repricing in Fed expectations continue to argue against major USD rallies. However, if markets continue to price in a Trump re-election effect into bond and FX markets, the balance of risks is tilted to the upside in the near term for the greenback.
Francesco Pesole
