Can’t stop, won’t stop | Forexlive

In the FOMC statement yesterday, markets got a taste of something new and interpreted it in a dovish light as the Fed noted that:

“In determining the pace of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation and economic and financial developments.”

Putting into context that markets were waiting to capitalise on any slip up by the Fed, this was enough for risk trades to rally and the dollar slumped in reaction to the statement. However, out comes Powell and everything turns back 180°. What exactly did Powell say in his press conference?

• The terminal rate may be higher than previously thought i.e. if we were to have another set of dot plots yesterday, they would have been higher – even if the outlook is still very uncertain
• It is “very premature to be thinking about pausing, very premature..”, even if there is any mention of looking into the lags in which monetary policy will take effect on the economy and inflation

Those were two critical points, adding to the notion that Powell hinted that the focus remains on how high rates have to go and how long does the Fed need to keep them there in order to stifle inflation pressures. In other words, it is better to do too much than to do too little in the tightening cycle and the Fed’s resolve in delivering on that remains unwavering.

As Adam pointed out here, it is rather clear that Powell will not accept markets thinking otherwise. I’ve pointed out yesterday how there is much at stake for the Fed, especially in terms of credibility. You can check out Powell’s word-for-word response to finding out that “stocks and bonds are reacting positively so far”. It comes at around 38:43 in the video below:

So, where do we go from here?

Ultimately, this will continue to keep the dollar in a strong position so long as economic data supports the Fed’s resolve. Inflation
Inflation

Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market.

Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market.
Read this Term and labour market data will remain key, so this week’s non-farm payrolls report will be another big one to watch.