Financial markets reversed their initial reaction after the latest FOMC Statement and press conference. In the two days that followed the June Fed meeting, the US dollar gained ground significantly against its peers in the developed world.
As such, the EURUSD fell from above 1.22 to 1.1850, the AUDUSD dropped a couple of hundred of pips, while the GBPUSD was strongly rejected at the 1.42. Also, stocks dropped in the United States and triggered a sharp decline in other equity markets too.
But it all lasted only two days. The week that just ended has seen the market participants changing their minds. Stocks reversed sharply, the US dollar weakness resumed, and overall risk-on outperformed.
What changed in the meantime? The answer comes from the Fed. Last Tuesday, Fed’s Chair Jerome Powell testified in front of the House Select Subcommittee on the Coronavirus Crisis, and he downplayed the hawkish statement. Moreover, Fed members held speeches the entire week, reassuring markets that the accommodative measures will remain in place for quite some time despite the hawkish dot plot.
Furthermore, the Fed still sees inflation as transitory. Food and energy prices are expected to come down past 2021, even though right now inflation exceeds the Fed’s target.
Focus Turns to Job Creation
Now that the inflation has reached the Fed’s target, the only chance the US dollar bulls have is for the job market to show significant improvements. While the strong economic growth and improvements in the labor market should bode well for the currency and the stock market indices, further developments in the labor market will bring the Fed closer to its job creation mandate.
Therefore, the Fed’s hawkish message will have greater credibility if the US economy is able to create more jobs. We will find out as soon as next week the current state of the labor market as the Non-Farm Payrolls report for the month of May is due.
