The minutes of the June Fed meeting, which have attracted significant market attention this week, is about to be revealed. Judging from the 75 basis points interest rate hike in mid-June, the June minutes are likely to be more hawkish. The Fed is expected to continue emphasising its determination to curb record-high inflation. Investors are more interested in identifying the possible future interest rate hike path from the minutes of the July FOMC meeting. Many are looking for the Fed's assessment of the impact of further interest rate hikes on the US economy, which will determine the next trend of the US dollar and US stocks.
Since the beginning of this year, the Fed has raised the benchmark interest rate by 150 basis points. There is widespread concern that the US economy has entered a recession. However, Powell's recent remarks show that he has not changed his determination to deal with inflation. He said that even if the process may be more "painful," he will continue hiking rates.
In the past, Jerome Powell has pointed out that he is more worried about the risk of being unable to contain record-high inflation. His primary concern is not the possibility of raising interest rates too quickly and plunging the economy into recession. Instead, he argues that the Fed must raise interest rates quickly, even if doing so increases the risk of a recession in the US. Powell believes that the Fed's actions will avoid the more severe economic risk of rising inflation becoming entrenched. He said the Fed does not have the time to gradually raise interest rates because of concerns that the current high inflation environment could lead consumers and price-makers to expect prices to keep rising.
Powell's remarks show that the Fed's hawkish monetary policy stance has not changed, including its position on future rate hikes. Still, it also reflected the Fed's desire to balance mitigating the risk of a recession and effectively curbing inflation. As a result, according to CME's "FedWatch" tool, the market currently expects the Probability of the Fed raising interest rates by 75 basis points in July to reach 85.6%, and the probability of raising interest rates by 50 basis points is at 14.4%.
These remarks continue to support the short-term trend of the US dollar. However, there had been a downward revision of interest rate hikes expectations earlier. The current market is still waiting for the June CPI data to be released by the United States on July 13 to judge the latest economic situation. Many are waiting to see if the economic downturn is too significant to affect the upward momentum of the US dollar. In addition, the ECB announced the launch of its interest rate hike plan in July, with more interest rate hikes expected after September. The ECB does not rule out the possibility of continued interest rate hikes, which has made the euro start to strengthen. A strong euro will cause some upward restrictions on the future direction of the US dollar.
(USD Index Chart)
The above chart shows that the dollar trend throughout the first half of this year, as tracked by the Wall Street Journal's dollar index, has been pretty bullish. The index tracks the US dollar's performance against 16 currencies and has risen 8% this year, its best performance since a similar period in 2010. However, the dollar's trend in the year's second half has some added constraints that could limit its gains. It may not be as good as the impressive performance in the year's first half. Nevertheless, unless significant downward pressure exists on the global economy, money will continue to enter the dollar as a safe haven, which may allow it to regain momentum.
The outlook for the US stock market is still not optimistic. Investors are worried that the US economy and the world's leading economies will fall into recession while high prices destabilise the market trends of various countries. If the June Fed meeting minutes emphasise urgency in containing inflation, explaining that the June interest rate hike measures as necessary will not be positive for the US stock market. A hawkish stance may push the dollar higher and cause the dollar index to rally, while the gold price that has recently hovered above the $1800 mark may remain under pressure.