What will actually move the dollar this week is if we finally get concrete news of a new trade deal. But, since that is entirely unpredictable at this point, let’s stick to the data. And there are plenty of reasons for the FOMC minutes and particularly the Fed’s preferred inflation figure to shake up the markets.
The Fed has been repeatedly making the argument that they need to wait to see the impact of the trade war on consumer prices before changing monetary policy. Which effectively means holding off on a rate cut, since pretty much everyone agrees that the next move will be to lower rates. Especially with one quarter of negative GDP growth already on the record.
Parsing Through the Minutes
Given that the last hold from the Fed was highly expected, the minutes from the meeting will liley affirm the narrative. What would move the markets is if there is some way to interpret what the FOMC members said as guidance around what could change their mind about the cut. Fed officials have been very vague about policy projections, so anything more concrete could shake up the markets.
Traders are still pricing in two rate cuts for this year. What has been happening, though, is that the timing for when the first one will happen keeps getting pushed back. Now, a rate cut isn’t fully priced in until September. But, there is still a 20% chance of a cut at the July meeting. If the minutes change that calculus, we could see the dollar move.
The Inflation Situation
The core April PCE price index is expected to remain unchanged at 2.6%, which is still above the Fed’s 2.0% target. But what could be an issue is the monthly rate is expected to accelerate at 0.2% compared to 0.0% in March. Given that April is when the tariffs were implemented, analysts might attribute that increase to the effect of the trade wars.
On the other hand, analysts have been projecting changes in data trends caused by Trump Administration policies that haven’t materialized. So, it wouldn’t be out of the ordinary for inflation to be lower than anticipated, particularly given the drop in energy prices over the last several months, which have had time to start filtering into the broader economy. On the other hand, a step up in inflation could leave investors pushing off the chances of a rate cut to even later.
Getting Over the Weakness
The thing is, the typical risk moves haven’t been really working lately. Usually, in a risk-off environment, markets will turn to the relative safety of the dollar. But with the major trade risk (tariffs) coming from the US, it’s been the opposite lately. The US had been largely immune to bond vigilantes who would force down the price of long-term Treasuries in other countries.
With the Moody’s downgrade and lingering concern that the US economy might not speed up, there is a loss of confidence in the US’ ability to pay its bills. This has left the dollar weaker. And since the Fed keeping rates elevated would be a drag on the economy, there has been the opposite effect on the dollar than normal. What would go a long way to restore dollar strength would be solid signs the US economy has a chance of growing faster than its debt.