The FOMC is scheduled to hold a meeting this week on Wednesday, on which the board of directors of the FED is going to decide how to adjust its monetary policy stance, and the sweeping market forecasts all point towards an almost inevitable interest rate cut as the most likely outcome of the meeting.
The expectation for a reduction of the rate by 25 basis points to 2.25 per cent is prompted by deteriorating internal economic factors in the US on the one hand, and also by the growing tensions surrounding the so-called currency war on the other.
Concerning the employment conditions in the US, the labour market is still looking extremely favourable and resilient with only a slight growth in overall unemployment with 1 per cent for the month of June to 3.7 per cent, which can still be interpreted as the labour market operating at full-employment.
In regards to the price-setting environment in the country, the falling inflation rate is arguably the most alarming trend in the performance of the overall American economy, and it is also the most likely factor to weigh in on Jerome Powell and the FOMC’s ultimate decision on Wednesday, in favour of an interest rate reduction.
The inflation rate has fallen to 1.6 per cent in June from the registered 1.8 per cent in the previous month, which is not only a deviation from the target level of 2 per cent symmetrical inflation, but is also the most striking indication that the current monetary stance of the FED is no longer accommodative of economic expansion and fiscal stability.
Further information about the causes that led to the falling inflation rate and the likely ramifications for the overall economy from the weaker inflation can be found here
In addition to the marginally rising unemployment and deteriorating inflation, the ECB has implied a possible rate cut by the end of the year which would give European companies a certain competitive advantage over their American counterparts, as the Euro becomes more appealing to foreign investors. Thus, Jerome Powell and the FED are now being pressured even harder by Wall Street and Washington to cut the rate in order to weaken the strong dollar and gain an advantage in international trade over the EU bloc.
The US Dollar Currency Index is currently trading at 98.03, which is just below the 98.15 resistance level that has been last tested on the 30th of May. The index has been rising more or less steadily since last week and depending on just how much the market has been able to price in a rate cut on Wednesday, the resistance level should be able to hold, even though the expected high volatility following the interest rate decision announcement might send the price temporarily above the level.