US Dollar Forex Reference JUNE
Updated monetary policy and projections
DERBYSHIRE GB / JUNE 16th, 2023 - Updated Monetary Policy section as well as all FOMC projection details Next update expected after the final Q1 GDP report on Thursday the 29th of June.
ABOUT
This is the US Dollar Forex Reference and contains factual information that has been researched from official sources as well as market commentators. It is intended to be used as a guide to aid in your analysis.
The U.S. dollar is the world’s most widely used currency, a safe haven asset, and a key indicator of global economic health. It is not backed by any physical commodity, but its value is based on faith in the U.S. government.
MONETARY POLICY
The Federal Reserve
The Federal Reserve is the central bank of the United States. The Board of Governors, which has seven members, sets discount rates. The Federal Open Market Committee (FOMC), which has 12 members, sets the levels of central bank money and the federal funds rate. The FOMC members include all members of the Board of Governors, the president of the New York Fed, and four presidents from the remaining eleven Reserve Banks on a rotating basis.
June Meeting of the Federal Reserve’s, Federal Open Market Committee
The Federal Funds rate was held in June at 5.00%-5.25%, following the 0.25% hike in May
This was as expected by analysts
This hold comes after ten consecutive hikes and has been characterised as a pause due to the Fed Chair commenting that higher rates are anticipated
The June FOMC projection for the Fed Funds Rate in 2023 was significantly raised to a peak of 5.6% from the 5.1% which was projected in March
Trading Economics have retained their Q2 2023 Fed Funds rate forecast at 5.25%
The next meeting is on Wednesday the 26th of July
The Federal Open Market Committee‘s June statement contained sentiment that appeared cautiously optimistic:
The economy is growing, but inflation is a concern
The U.S. banking system is strong, but tighter credit could slow the economy
The Federal Reserve will keep interest rates steady for now, but is prepared to raise rates more if needed to bring inflation down to its 2% target
The Fed will continue to monitor the economy and adjust monetary policy as needed to achieve its goals
Sources: Federal Reserve, Trading Economics, FXStreet
FOMC Projections
The FOMC revised the projections at their June meeting and will update them again at the September meeting.
Projections of change in real gross domestic product (GDP) are percent changes from the fourth quarter of the previous year to the fourth quarter of the year indicated.
ECONOMIC DATA
Gross Domestic Product (GDP)
In the US, GDP Growth Rate measures the yearly change in the price of goods and services purchased by consumers.
GDP Growth Rate Second Estimate for Q1 2023
GDP in the US for Q1 slowed to a 1.3% annualised expansion from 2.6% in Q4 2022
However, this was better than the 1.1% expansion expected by analysts
Increases in consumer spending, exports, and government spending were offset by decreases in private inventory investment and residential fixed investment, as well as an increase in imports
The June FOMC projection for the 2023 change in real GDP was significantly raised to 1.0% from the 0.4% projected in March
Trading Economics have retained their Q2 2023 annualised growth forecast at 1.5%
The final Q1 report is due on Thursday the 29th of June
Sources: Bureau of Economic Analysis, Trading Economics, FXStreet
Inflation
In the US, inflation is measured with the Consumer Price Index (CPI) which measures the yearly change in the price of goods and services purchased by consumers.
CPI for May
CPI in the US for May significantly slowed to 4.0% annual inflation from 4.9% in April
This was slightly slower than the 4.1% expected by analysts
CPI is now at its lowest since March 2021 and driven by a decline in energy prices which deflated 3.6%
The June FOMC projection for the 2023 PCE projection (PCE is not CPI) was slightly lowered to 3.2% from the 3.3% projected in March
Trading Economics have significantly lowered their Q2 2023 CPI forecast to 3.6% from 4.4%
The June report is due on Wednesday the 12th of July
Sources: Bureau of Labor Statistics, Trading Economics, FXStreet
Unemployment
In the US, unemployment is measured as the number of people actively looking for a job as a percentage of the labour force.
Labor Report for May
Unemployment in the US for May increased a lot to 3.7% from 3.4% in April
This was higher than the 3.5% expected by analysts
Nonfarm payrolls climbed to 339K from 294K which itself has been upwardly revised from 253K
The June FOMC projection for the 2023 unemployment rate was lowered to 4.1% from the 4.5% projected in March
Trading Economics have lowered their Q2 2023 unemployment rate forecast to 3.6% from 3.8%
The June report is due on Friday the 7th of July
Sources: Bureau of Labor Statistics, Trading Economics, FXStreet
GEOPOLITICAL EVENTS
Russian Invasion of Ukraine
The war is having a detrimental effect on the global and US economy by causing higher energy prices, higher food prices, higher inflation and is impacting economic growth.
2021: 92,000 Russian troops are amassed at the Ukraine border and President Putin proposes a prohibition of Ukraine joining NATO which is rejected.
2022: On the 21st of February, President Putin ordered Russian forces to enter the separatist republics in eastern Ukraine and announced recognition of the two pro-Russian breakaway regions (Donetsk People's Republic and Luhansk People's Republic). NATO applied sanctions and scaled them up as the war progressed. Ukraine mounted a counter-offensive which regained lost territory and as winter arrived, a stalemate began.
2023: Russian began a new offensive in January although gained little ground. In early June, Ukraine began its counteroffensive.
China-US Trade War
The trade war is having a detrimental effect on the global and US economy by causing higher prices for consumers, increased uncertainty for businesses, disrupted supply chains, job losses and is impacting economic growth.
2018: President Trump imposed tariffs on Chinese goods in an effort to reduce the trade deficit and promote domestic manufacturing. China retaliated with tariffs of its own. Negotiations are ongoing to resolve the trade dispute.
2019: Reports showed that the trade deficit increased to record levels in 2018 and the situation escalated through rhetoric. China was accused of currency devaluation (which would make exports more attractive) although the IMF rejected the claim. Negotiations continued throughout the year and a tentative deal was proposed in Q4 which aimed to improve relations and repair the damage that had been caused to both economies as a result of the trade war.
2020: A deal called Phase One was signed at the beginning of the year although the trade targets appeared unrealistic and were missed by year end.
2021: President Biden takes office and reviews the Phase One deal with ongoing talks throughout the year.
2022: The WTO declared the Steel and Aluminium tariffs to be in breach of rules although the Biden administration disputed this and has maintained the trump era tariffs. The disagreement with the WTO is ongoing.
2023: The EU has joined the US in blocking the sale of technology to China that would allow it to produce advanced semiconductor chips.
MARKET NARRATIVES
2023 Debt Ceiling Crisis
The debt ceiling crisis is reducing investor confidence in the dollar and therefore having a negative effect on its value.
The US hit its debt ceiling on the 18th of January 2023 and Secretary Yellen began enacting temporary "extraordinary measures" to pay the bills although this is unlikely to continue beyond the 1st of June. With a split congress (Democrats control the senate and Republicans control the House of Representatives) there is an impasse on getting an agreement to raise the debt limit.
If the ceiling is not raised then the Treasury would begin to default on payments which is expected to result in a global economic meltdown.
A deal was made between President Biden and House speaker Kevin McCarthy on May 27th to increase the debt-ceiling but cap federal spending. The bill titled Fiscal Responsibility Act of 2023 passed the House on May 31 and the Senate on June 1.
Crisis resolved on the 3rd of June when President Biden signed the Fiscal Responsibility Act of 2023 into law which suspends the debt limit until 2025.
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