The US dollar index was relatively unchanged in overnight trading as investors waited patiently on the Federal Reserve interest rates decision. The decision will come at 2100 GMT and is expected to be the biggest news of the day. It also comes a day after it emerged that the White House had considered the legalities of replacing Jerome Powell, who was appointed by Donald Trump to replace Janet Yellen. Trump has disagreed with the chair for his record of raising interest rates.
The Fed is widely expected to leave interest rates unchanged at the current 2.50%. Therefore, the decision to leave rates unchanged in itself will not be the market mover. What will move the markets will be the statement that will accompany the rates decision and the press conference that will follow.
In recent statements, the Fed members have expressed their willingness to tweak the interest rates in response to the current economic issues. This has generally meant that they might be open to a rate cut in the near future. Investors believe that this cut may happen at the September meeting.
The change of mind from being overly hawkish at the December meeting to the current state of being dovish comes at a time when the world is facing a number of challenges. The United States is currently in a trade conflict with China. Recently, it imposed tariffs on goods worth more than $200 billion. In total, the US has a 25% tariff on Chinese goods worth more than $250 billion. This week, public hearings are going on in Washington as businesses continue to convince the US president not to impose additional tariffs worth more than $300 billion. Businesses argue that the new tariffs will cripple their businesses.
The US is also engaged in a trade conflict with the European Union, which is one of the country’s closest friend. As with China, the US president has focused on the trade deficit, which is merely exports minus imports. Economists believe that this argument is illogical because all countries benefit in different ways with free and open trade. This is because while the US has a large goods deficit with other countries, it has a large service surplus with most countries. These jobs in the service industry pay better than those in the manufacturing industry. Further, Americans are not ready to do some of the work that the Chinese does. In addition, the trade war only lifts the deficit because foreign companies buy less American goods.
The impact of the trade conflict has been revealed in the recent economic data. This month, data from the Labor department showed that the US economy added just 75k jobs in May. This was much lower than the 180k that investors were expecting. The inflation released last week showed that the CPI declined slightly in the month. The same is true with the housing starts data released yesterday and the previously released manufacturing data.
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