The US dollar index tells you all you need to know about the current situation in the forex market. For a week now the dollar has been trading within the daily range printed on the 16th of June after the Federal Reserve raised their Funds Rate by 75bps the day before. Currently the market is waiting for Fed Chair Powell to wrap up his testimony before turning its attention to tomorrows University of Michigan inflation data. It was the preliminary UoM inflation expectations that tipped the FOMC from raising by 50bps to 75bps. What we are trying to work out now, is whether the Fed will repeat a 75bps at the July meeting.
During Fed Chair Powell’s testimony there was lots of talk about fighting inflation and that the labour market is unsustainably hot. The Fed is treating its dual mandate equally and that price stability is the bedrock to a healthy economy. The Fed will also be reducing the balance sheet by $95bln a month with and endpoint around $2.5-$3.0 trillion smaller than now. So it’s going to take some time to get the balance sheet down.
The Nasdaq has seen some of the greatest declines since the inflation got out of control and the Fed had to expeditiously start raising rates. Just like the DXY this index has also traded sideways within the range that printed on the 16th of June.
Precious metals and energy have fallen again today, with the price of Brent finding support at the rising trend line and $106 per barrel price level. The price action hasn’t taken out yesterday’s lows, but momentum has been pulling price action lower since the crude oil markets topped out in early June. Rate hikes will be killing demand, and consumer sentiment is dropping already showing that consumers will be tightening the purse strings as the recession fears are building up. US factory growth is nearing a 2-year low and todays flash PMIs from Europe, the UK and USA were largely disappointing.
The US weekly initial jobless claims came in slightly higher than expectations, but the silver lining was that they were lower than the previous 2-weeks data. From the graph above it is probably obvious that the 4-week average has grown, with the actual figure coming in at an increase of 4,500 more claims on average.
The Japanese yen has maintained its relative strength against the other currencies today and as the London session closed the Swiss franc flows also turned positive. There was a distinct move into the safe-haven currencies today, so we could be in for a risk-off start tomorrow. Which would mean further declines in the commodities and equities.