The dollar is in focus this week with three major events that could significantly alter its trajectory on the calendar. Which is besides the unpredictable geopolitical risks, as well. Fed Chair Jerome Powell will be on Capitol Hill explaining to lawmakers what the FOMC has been up to. US durable goods figures come out on Thursday. Then all eyes are on Friday’s release of the PCE price index, since that’s the Fed’s favorite measure for inflation.
Powell’s testimony could be considered the most important, since it is an opportunity to get some insight into when the Fed might actually get around to easing. But, coming so close after the FOMC meeting last week, Powell might just stick to the script he already used. Especially if we consider that there hasn’t been any major data releases in the intervening period.
What Markets Are Looking For
At the last Fed meeting, officials confirmed what the market was expecting in terms of monetary policy easing. That is, 50 bps, or two rate cuts. Futures have that penciled in for September and December. This has left the dollar largely reacting to geopolitical situations as investors look for safe havens. The situation in the Middle East has displaced worries about the trade war, for now. But the clock is ticking to sign a deal with key trading partners in order to avoid economy-hurting tariffs.
A slowing economy, however, does make the case for more easing. On the other hand, rising inflation could derail expectations for easing. The Fed has insisted that the US economy is on a solid footing. In fact, its GDPNow tracker is pointing to a 3.4% annual growth rate in Q2. Which means that if tariffs or higher oil prices filter through to cause higher inflation, the Fed has room to just not cut rates.
What the Data Points To
This is why Thursday’s durable goods orders figures are in focus. Businesses will be hesitant to make large, long-term investments if they think they won’t see a growing economy to support increased sales. The tariff situation, however, has caused some large fluctuations in the data. The consensus is for May core durable goods to show a rebound and grow at a 5.2% annual rate compared to -6.3% reported a month prior.
The boost in economic confidence could come with another dose of cold water for the markets: May Core PCE price index is expected to accelerate to 2.6% from 2.5% prior. This means it is moving away from the Fed’s 2.0% target. This acceleration is due to economists predicting higher prices from the effect of tariffs. Economists have been predicting that for a couple of months now, and inflation has largely underperformed.
The Market Outlook
Usually, the Fed likes to give some advance warning for when it will change policy. If it planned to cut rates in September, there is still the July meeting to give hints to the market. Which means that Powell can keep to the current script and the market will likely keep pricing in a cut in September. But, if there were to be a cut earlier at the July meeting, then the testimony before Congress is an opportunity to drop those hints. But, the market says there is only a 15% chance of that happening.
With the Fed inclined to hold, the dollar could continue to get support if the US economy shows resilience. Gold is trading near record highs, but might need some help from lower interest rates to get sustainable gains. Markets are likely waiting to see what happens in the Middle East before going back to worrying about the trade wars.
