US Dollar Hangs in the Balance
Watch for the Fed's July meeting, Chinese economic data release, and key data releases in the coming weeks, as these events could significantly impact the USD.
Saturday, 13 July, Week 28
Balancing Spending and Debt
The US fiscal policy landscape has been dominated by the passage of the Fiscal Responsibility Act of 2023, which suspended the debt ceiling until 2025. This Act limits discretionary spending growth over the next two years, providing some certainty about the near-term fiscal outlook. The President's 2025 Budget proposal, released in March, aims to reduce the deficit by $3 trillion over the next decade through a combination of spending restraint and revenue enhancements, primarily targeting wealthy individuals and corporations. The proposal also includes significant investments in areas like infrastructure, clean energy, and social programs.
The current fiscal policy can be characterised as moderately restrictive, with a focus on deficit reduction. However, the significant investments proposed in the President's budget could be seen as expansionary. The upcoming 2025 appropriations process will be crucial in determining the actual impact of fiscal policy on the economy. Forex traders should pay close attention to the negotiations and their outcome, as they will signal the government's commitment to fiscal sustainability and its potential impact on economic growth.
Fiscal policy is a key driver of macroeconomic conditions, influencing aggregate demand, economic growth, and inflation. Government spending and tax policies directly impact consumer and business spending, investment decisions, and overall economic activity. The impact of fiscal policy on the USD is complex and depends on various factors, including the size and timing of policy changes, market expectations, and global economic conditions.
Growth, Inflation, and Uncertainty
The US economy presents a mixed picture. The labour market remains strong, with continued job gains and a low unemployment rate, but there are signs of moderation. Inflation has eased from its peak, but core inflation remains above the Fed's 2% target. The housing market has slowed, and concerns about a potential recession persist. The economic outlook for the next five weeks hinges on key data releases and the Fed's policy decisions.
Recent economic indicators highlight this mixed picture. The Q1 2024 GDP growth rate slowed to 1.4%, the lowest since the contractions in the first half of 2022. However, June's non-farm payrolls came in above consensus at 206K, while the unemployment rate ticked up to 4.1%. Inflation has eased, with the June CPI at 3% and core CPI at 3.3%, but both remain above the Fed's target. The housing market continues to cool, with existing home sales declining in May and housing starts falling to a two-year low.
Economic Growth:
United States GDP Growth Rate: Measures the annualised percentage change in the value of all goods and services produced in the US.
Previous: 3.4% (Q4 2023)
Latest: 1.4% (Q1 2024)
United States Durable Goods Orders: Measures new orders placed with domestic manufacturers for goods designed to last three years or more.
Previous: 0.2% (April 2024)
Latest: 0.1% (May 2024)
United States Factory Orders: Measures new orders placed with domestic manufacturers for all types of goods.
Previous: 0.4% (April 2024)
Latest: -0.5% (May 2024)
Labour:
United States Non Farm Payrolls: Measures the change in the number of people employed in the US economy, excluding farm workers.
Previous: 165K (May 2024)
Latest: 206K (June 2024)
United States Unemployment Rate: Measures the percentage of the labour force that is unemployed.
Previous: 3.9% (May 2024)
Latest: 4.1% (June 2024)
United States Initial Jobless Claims: Measures the number of people filing for unemployment benefits for the first time.
Previous: 239K (June 29, 2024)
Latest: 222K (July 6, 2024)
United States Job Openings: Measures the number of job openings in the US economy.
Previous: 7.919M (April 2024)
Latest: 8.14M (May 2024)
Price Changes (Inflation):
United States Inflation Rate: Measures the annual percentage change in the Consumer Price Index (CPI).
Previous: 3.3% (May 2024)
Latest: 3% (June 2024)
United States Core Inflation Rate: Measures the annual percentage change in the CPI excluding food and energy prices.
Previous: 3.4% (May 2024)
Latest: 3.3% (June 2024)
United States Producer Price Inflation MoM: Measures the monthly percentage change in the Producer Price Index (PPI).
Previous: 0% (May 2024)
Latest: 0.2% (June 2024)
United States Core PCE Price Index MoM: Measures the monthly percentage change in the core Personal Consumption Expenditures (PCE) price index.
Previous: 0.3% (April 2024)
Latest: 0.1% (May 2024)
Housing:
United States Nahb Housing Market Index: Measures homebuilder sentiment about current and future sales conditions.
Previous: 45 (May 2024)
Latest: 43 (June 2024)
United States Building Permits: Measures the number of building permits issued for new residential construction.
Previous: 1.44M (April 2024)
Latest: 1.399M (May 2024)
United States Housing Starts: Measures the number of new residential construction projects started.
Previous: 1.352M (April 2024)
Latest: 1.277M (May 2024)
United States Existing Home Sales: Measures the number of existing homes sold.
Previous: 4.14M (April 2024)
Latest: 4.11M (May 2024)
United States Pending Home Sales YoY: Measures the year-over-year percentage change in the number of pending home sales.
Previous: -7.4% (April 2024)
Latest: -6.6% (May 2024)
Business:
United States ISM Manufacturing PMI: Measures the level of activity in the US manufacturing sector.
Previous: 48.7 (May 2024)
Latest: 48.5 (June 2024)
United States ISM Services PMI: Measures the level of activity in the US services sector.
Previous: 53.8 (May 2024)
Latest: 48.8 (June 2024)
United States Philadelphia Fed Manufacturing Index: Measures the level of activity in the manufacturing sector in the Philadelphia region.
Previous: 4.5 (May 2024)
Latest: 1.3 (June 2024)
Consumer:
United States Michigan Consumer Sentiment: Measures consumer confidence about current and future economic conditions.
Previous: 68.2 (June 2024)
Latest: 66 (July 2024)
U.S. Retail Sales: Measures the total receipts of retail stores.
Previous: -0.2% (April 2024)
Latest: 0.1% (May 2024)
United States Personal Spending: Measures consumer spending on goods and services.
Previous: 0.7% (March 2024)
Latest: 0.2% (April 2024)
Trade:
United States Balance of Trade: Measures the difference between the value of US exports and imports.
Previous: -$74.5B (April 2024)
Latest: -$75.1B (May 2024)
The economic indicators for the next five weeks, including the July FOMC meeting, Q2 GDP data, and the July CPI report, will be crucial in shaping the outlook for the US economy and the USD.
The Fed Holds Steady, But For How Long?
The Federal Reserve has paused its aggressive interest rate hiking cycle, leaving the federal funds rate at a target range of 5.25% to 5.50% for a seventh consecutive meeting in June. The Fed's June statement acknowledged "modest further progress toward the Committee’s 2 percent inflation objective" but maintained a data-dependent approach, stating that "the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks" in considering any adjustments to the target range.
The Fed's dot plot, released alongside the June statement, showed that policymakers expect only one rate cut this year, followed by four reductions in 2025. This is a more hawkish outlook than in March, when the Fed was projecting three cuts in 2024 and three in 2025. The Fed's decision to pause reflects the ongoing tension between easing headline inflation and persistent core inflation.
The FOMC minutes from the June meeting revealed that "participants emphasised that they did not expect that it would be appropriate to lower the target range for the federal funds rate until additional information had emerged to give them greater confidence that inflation was moving sustainably toward the Committee’s 2 percent objective." The minutes also highlighted concerns about the potential impact of a premature pivot to rate cuts, noting that "a premature easing of monetary policy could lead to a resurgence of inflation."
The Fed's July meeting will be crucial for the USD. Forward guidance will be closely scrutinised for any signals about the future policy path. A hawkish surprise, with the Fed signalling that it is not yet ready to pivot to rate cuts, could trigger a strengthening of the USD. Conversely, a dovish surprise, with the Fed signalling that it is open to cutting rates sooner than expected, could weaken the USD.
Navigating the Minefield: Key Risks Ahead
The US economy and the USD face several key risks over the next five weeks.
Top Three Potential Risks (July 14th - August 17th):
Fed Policy Misstep (July FOMC Meeting): The Federal Reserve's communication and policy decisions will be closely scrutinised for any signs of a misstep that could trigger market volatility.
Synopsis: A premature pivot to rate cuts could reignite inflation concerns, while a continued hawkish stance could exacerbate recession fears. This could impact the USD, potentially strengthening it on safe-haven flows if risk aversion rises.
Chinese Data Releases (Monday, July 15th): The release of Q2 GDP, Industrial Output, and Retail Sales data from China could disappoint, reflecting the ongoing economic slowdown and potentially impacting global risk sentiment.
Synopsis: Weaker-than-expected data could trigger a risk-off move, impacting the USD.
Earnings Season Disappointments (July - August 2024): Corporate earnings reports could disappoint, reflecting the impact of slowing economic growth and persistent inflation.
Synopsis: This could weigh on equity markets and potentially trigger a broader risk-off sentiment, impacting the USD.
Conclusion: USD's Fate Hangs on Fed and China
The USD's direction over the next five weeks hinges on the Federal Reserve's policy decisions and the performance of the Chinese economy. The Fed's July meeting will be crucial, as it will provide insights into the Fed's thinking about the balance of risks between inflation and recession. The release of Chinese economic data on July 15th could also impact global risk sentiment and influence the USD. Forex traders should closely monitor these events and other key data releases in the coming weeks, as they could trigger significant volatility in the USD.
Key Takeaways for Forex Traders:
The Fed has paused its rate hiking cycle, but the outlook for future rate cuts remains uncertain.
The July FOMC meeting will be crucial for the USD, as it will provide insights into the Fed's thinking about the balance of risks between inflation and recession.
The release of Chinese economic data on July 15th could also impact global risk sentiment and influence the USD.
Forex traders should closely monitor these events and other key data releases in the coming weeks, as they could trigger significant volatility in the USD.
Sources:
U.S. Bureau of Labor Statistics
U.S. Bureau of Economic Analysis
U.S. Census Bureau
Federal Reserve
S&P Global
Institute for Supply Management
National Association of Home Builders
University of Michigan
Federal Reserve Bank of New York
Federal Reserve Bank of Philadelphia
Federal Reserve Bank of Dallas
Federal Reserve Bank of Chicago
U.S. Treasury