Dormant Inflation Kills The King Dollar
The FOMC committee members were all over the place rather than showing a united front during their FOMC minutes. However, the Fed left some life in the concept of winding down their balance sheet in September. The division is the chief concern here because some members feel comfortable that the inflation target would be achieved, others believe that there are strong odds that the current inflation is too weak and then you have the remaining members who anticipate that the Fed could be behind the curve.
The recent saggy inflation data made the committee ask themselves whether the inflation is dormant in the US. The data confirmed that the Fed does not need to keep hiking the interest rate at a supersonic pace, and this has taken the wind out of the dollar rally. Overall, the sentiment is negative amid dollar bulls, and the path of the least resistance is skewed to the downside. The dollar is suffering from a double whammy, Trump dissolved his two business advisory groups and then the Fed has shown their concern about the US inflation.
Initially, investors were optimistic about Trump's fiscal plan and they bet big on the dollar and on the US economy. However, Trump dissolving his major business groups makes the investment community even more pessimistic because this sets the stage for more failure for him. You can pretty much say goodbye to the idea that he would deliver anything on his promises. The double whammy doesn't stop here because we do not contemplate that investors have not paid attention to the details about Trump dealing with the recent violent situation in Charlottesville. His comments have divided the nation further which creates a more unstable ground for investments.
On the economic docket, we have the US unemployment data and Philly Fed number due later this afternoon. But the event which would matter for the dollar would be the Fed meeting in September.
Gold At The Mercy of Fed and Geopolitics
The precious metal may have another stab on the 1300 mark after recouping its losses yesterday. The geopolitical tensions are at the mercy of Trump's tweet and another missile test by North Korea. Finding a diplomatic solution to these tensions could ease those concerns and only that would take the shine off of the yellow metal, however given the nature of the personalities involved, it is arduous to fathom how that could happen. The Fed has dialled back from their hawkish stance and the minutes from the FOMC are dubbed dovish. All of this makes a firmer foundation for a bullish case for gold. The members were reticent when it comes to the timing and this also brings a big question mark for another rate hike for this year.
Fed In Rear Mirror and ECB To Show Path
With the Fed decision in the rear mirror, investors are focused on the ECB Minutes and they will try their best to get some clue with respect to the ECB's strategy to finally cuff the loose monetary policy. We do know that Mario Draghi is not going to lay down any kind of foundation with respect to the monetary policy during the Jackson Hole event. The bank has drummed one beat which is persistent and patience and we do think that the minutes will echo the same message. Inflation is still well behind their target thus, the ECB has many arms to combat any hawkish stance.
The Euro would be left high and dry if the ECB actually disappoints in not triggering any reasonable measures to tighten its monetary policy.
The European Central Bank has another bright star to look at; the annual GDP growth in the Eurozone was revised higher to 2.2 percent y/y. However, it does not mean that the economy in the Eurozone is sparking because the recovery is still uneven among the member states. Moreover, the inflation number has not recovered to pre-crisis level and the ECB does consider this as a vital part of their equation. Therefore, we do think that the ECB remains cautious in relation to their upcoming hawkish stance and they would certainly address the strength of the Euro. A higher euro is nothing but diabetes for the Eurozone's export.