Fed: How Many Cuts for a Solid Economy?

07/17/2019 12:39 pm EST

Focus: FOREX

Adam Button

Co-Owner and Managing Director, ForexLive.com

The U.S. dollar rose Tuesday on the combination of stronger retail sales and Fed hints that cuts might not be so deep, reports Adam Button.

The U.S. dollar rose Tuesday on the combination of stronger retail sales and Fed hints that cuts might not be so deep. The British pound lagged falling to its lowest point since April 2017 on Brexit fears. Consumer Price Indexes for UK, Eurozone and Canada all came in within expectations, but GBP continues to focus on no-deal Brexit related remarks six days ahead of the selection of the new Prime Minister.

U.S. building permits and housing starts fell by more than expected.  

From the Fed

Former St. Louis Fed President Bill Poole once argued that markets focus too much on the upcoming Fed meeting and not enough on themes and policies that will persist. At this point, a July 31 cut is inevitable. Retail sales were strong with the control group up 0.7% compared to the +0.3% consensus but minutes after the release, Powell brushed it off. He called the consumer and domestic economy solid but once again pointed to uncertainty on trade, business investment and inflation.

It's increasingly clear that the Fed thinks it has gone beyond neutral and needs to take back some rate cuts to boost inflation. Evans and Kaplan added more color Tuesday with Kaplan's comments giving a boost to the dollar by framing a cut as 'tactical' and not the start of a cycle. Evans continued to flirt with the idea of a 50 basis point cut, but was clear that he only sees 50 basis points  in total easing this year and whether it was all at once or in two parts was a matter of strategy.

Markets and the Fed are on the same page in terms of near-term action but where the rhetoric and market pricing diverges is into 2020. There is a 45% chance of four or more cuts by this year priced into the Fed fund futures market. The implication is that there will be a deeper slowdown but the Fed and other central banks could engineer a soft landing.

Back to Politics

Of course, since it's 2019, it all comes back to politics. What markets are grappling with is Brexit and the U.S. trade war. Boris Johnson and Jeremy Hunt both said they would need to tear up the Irish border backstop Tuesday and a leak suggested Johnson was serious about keeping out Member of Parliament around the Oct. 31 Brexit deadline. That helped to send the pond down 110 pips. On the U.S. side, President Trump took a less optimistic tone on China and talked about tariffs. That hurt equities.

Inflation will be the theme in the day ahead as the pound searches for a spark of life in a market that's betting heavily against it, according to the Commodity Futures Trading Commission’s Commitments of Traders data.

The consensus on inflation is for a flat monthly reading and 2.0% yearly rise.

Earlier today, Canada's June CPI held at 2.2% (median core year-over-year) with the figures among the few spots showing an acceleration in inflation (and an acceleration in activity). The Canadian dollar remains by far the strongest currency so far this year as it is over the last six months.

Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com. You can see Ashraf’s daily analysis at www.AshrafLaidi.com and sign up for the Premium Insights. Ashraf's Tweet on indices here.

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