Fed rejects Phillips rule: The dollar receives a positive signal, EUR and GBP complete correctional growth
The US Inflation Report in June was noticeably better than forecast, which led to a reassessment of prospects for the 2nd half-year rate. Prices rose by 0.1% with year-on-year growth of 1.6%, which is slightly below +1.8% in May but still in line with forecasts. At the same time, core inflation excluding energy and food prices rose by 0.3%. This is the maximum increase since January with 2.1% year-on-year (a very good indicator from the point of view of the Fed).
Thus, as the FOMC meeting approaches on July 31, the regulator is already receiving a second benchmark after a report on the labor market. This indicates that no emergency measures are necessary and such signal will be understood by the markets correctly. The Fed must show that it fully controls the situation, which means that one or two rate cuts to the youth of the year do not indicate a recession but merely an adequate response to a slowdown in business activity.
Fed Chairman J. Powell, speaking at the Banking Committee of the US Congress, said that the link between inflation and the state of the labor market has disappeared. This means that the Fed no longer focuses on the Phillips curve, which means that the likely worsening of the employment market in the coming months will not have any effect on its decisions.
For the dollar, the signal is more than positive and indicates that the rate cut on July 31 to which the markets have long been ready, will not entail long-term consequences. This means that the dollar will not fall, and may even resume growth at the end of the meeting.
There is less than two weeks before the ECB meeting and the question of how actively the regulator is ready to resume stimulating the European economy remains open. It seems that the failure of 2018 is not yet developing, but in any case, the business indices have stopped falling and stabilized.
Perhaps the decisive factor in assessing the prospects for the euro area is the labor market. If unemployment continues to decline, consumer demand will remain at a sufficient level to stop external influences, such as Brexit or trade wars. If job cuts begin, then sustaining domestic demand will no longer be possible, in which case the GDP forecast will worsen and the ECB will be faced with the need to expand incentives.
So far, the dynamics are positive and the ECB in its forecasts is focused on further reducing unemployment.
The pound took advantage of the weakness of the dollar and partially recovered after two weeks of falling but growth does not mean a reversal. However, only sales from higher levels can resume at any moment.
The upward impulse may continue to the resistance of 1.2560/60 but the chances for further growth are low. It seems that a decline by Friday evening is more likely towards the support of 1.2505/10 with an attempt to go lower at 1.2460/70.
The material has been provided by InstaForex Company – www.instaforex.com