Dollar gains more ground post-Fed
The dollar has gained more ground following yesterday’s Fed meeting. The central bank left interest rates unchanged as widely expected, though two members voted for a 25bps cut, while the Fed Chair Jerome Powell said no decision had been taken regarding the next meeting in September, noting that there’s plenty of economic data due between now and then to inform the appropriate action to be taken on rates. The euro is more than a cent lower against the dollar versus yesterday morning’s levels, trading at around $1.1440 (which is off its immediate post-meeting low of close to $1.14), and has edged down a little further against sterling, to £0.8630, while the pound has shed a bit less than a cent against the US currency to trade at about $1.3250.
US bond yields backed up post the Fed meeting, ending the day 5-7bps higher across the curve, as the market pared back expectations for rate cuts over the coming months (with not much more than one 25bps reduction now priced in by the end of the year), though they have retraced some of the move higher in overnight trading in Asia, while German and UK yields are nudging down at the open this morning. In equity markets, the S&P 500 gave up initial gains to close marginally lower on the day. The futures market points to a positive open later though following good results from Mircosoft and Meta, while European stocks have opened in the red this morning.
In its monetary policy statement the Fed noted that “growth of economic activity moderated in the first half of the year…the unemployment rate remains low (and) inflation remains somewhat elevated.” At his post-meeting press conference, Jerome Powell said a “reasonable base case” is that the impact of tariffs on inflation will prove temporary, though there’s a possibility it proves more persistent, and noted that there are downside risks to employment as jobs growth has moderated. He also said the “next steps” are likely to see interest rates lowered towards a more neutral level but indicated that the timing of this is uncertain.
Yesterday’s GDP report in the US showed the economy rebounded in the second quarter of the year, expanding at 0.7% q-o-q having contracted by 0.1% in Q1. However, abstracting from swings in net exports (which weighed on GDP in Q1 but boosted it in Q2), the pace of economic growth has moderated this year (as mentioned in the Fed’s statement) mainly due to a deceleration in the growth of consumer spending from very robust levels over the second half of 2024. Meanwhile, the latest GDP data for the Euro area showed growth slowed to 0.1% q-o-q in Q2 from 0.6% in Q1, the latter having been boosted by a front-loading of activity ahead of expected US tariffs.
Looking to the day ahead, economic data include unemployment in the Euro area and jobless claims, employment cost index (ECI), personal incomes & spending, and PCE inflation in the US. According to the consensus forecast, the annual rate of headline PCE inflation is seen nudging up to 2.5% in June, from 2.3% in May, with the core rate expected to be unchanged at 2.7%.