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Can’t stop, won’t stop |  Forexlive


In yesterday’s FOMC statement, markets got a taste of something new and interpreted it in a dovish light, with the Fed noting that:

“In determining the pace of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Putting into context that markets were waiting to capitalize on any slippage from the Fed, that was enough for risky trading to rally and the dollar to crash in reaction to the statement. However, Powell comes out and everything turns 180°. What exactly did Powell say at his press conference?

  • The terminal rate may be higher than previously thought, i.e. if we were to have another set of dot charts yesterday they would have been higher – although the outlook is still very uncertain
  • He is “very premature to think about taking a break, very premature..”even if it is a question of examining the delays in the effect of monetary policy on the economy and inflation

These are two critical points, adding to the idea that Powell hinted that the focus remains on how high rates are and how long the Fed needs to hold them in order to quell inflationary pressures. In other words, it is better to do too much than too little in the tightening cycle and the Fed’s resolve to do so remains unwavering.

As Adam pointed out here, it’s pretty clear that Powell won’t accept the markets thinking otherwise. I pointed out yesterday how much there is at stake for the Fed, especially in terms of credibility. You can check out Powell’s verbatim response to find that “stocks and bonds are reacting positively so far.” He arrives around 38:43 in the video below:

So where do we go from here?

Ultimately, this will continue to keep the dollar in a strong position as long as the economic data supports the Fed’s resolve. Inflation

Inflation

Inflation is defined as a quantitative measure of the rate at which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general price level where a given currency is effectively buying less than it has in previous periods. In terms of valuation of strength or currencies, and by extension foreign currencies, inflation or its measures are extremely influential. Inflation stems from the global creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply relative to the wealth produced (measured with GDP). This thus generates demand pressure on a supply that is not increasing at the same rate. The consumer price index then increases, generating inflation. How Does Inflation Affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies on several levels. This includes purchasing power parity, which attempts to compare the different purchasing power of each country based on the general level of prices. By doing so, it helps to determine the country with the most expensive cost of living. The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates in the forex market. Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on the exchange. Conversely, too low inflation (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the foreign exchange market.

Inflation is defined as a quantitative measure of the rate at which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general price level where a given currency is effectively buying less than it has in previous periods. In terms of valuation of strength or currencies, and by extension foreign currencies, inflation or its measures are extremely influential. Inflation stems from the global creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply relative to the wealth produced (measured with GDP). This thus generates demand pressure on a supply that is not increasing at the same rate. The consumer price index then increases, generating inflation. How Does Inflation Affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies on several levels. This includes purchasing power parity, which attempts to compare the different purchasing power of each country based on the general level of prices. By doing so, it helps to determine the country with the most expensive cost of living. The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates in the forex market. Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on the exchange. Conversely, too low inflation (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the foreign exchange market.
Read this term and labor market data will remain critical, so this week’s nonfarm payrolls report will be another big one to watch.

As for the general market sentiment, it will be hard to tell, but overall we could expect another decline. In the case of the S&P 500, its rejection at the 100-day moving average makes it much worse – adding to the sustained pattern of lower highs, lower lows:


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