How well did Powell pitch the dollar last week?

Currency pair	x-rates.com	OANDA
EUR/USD	1.0901	1.0905
GBP/USD	1.2721	1.2688
AUD/USD	0.6691	0.6663
NZD/USD	0.6189	0.6146
USD/CHF	0.8957	0.8967
USD/JPY	144.3902	144.6120

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What the data shows …

The EUR/USD increased three pips over the last 24 hours according to data from OANDA and x-rates.com. 

The GBP/USD showed a five pip increase according to x-rates.com, but OANDA data reflected a seven- pip decrease in the cable rate.

The AUD/USD showed, in my opinion, a large increase in price with forty pip increase, according to x-rates.com.  OANDA reflected a smaller increase of nine pips.

According to x-rates.com data, the NZD/USD increased fifty pips while OANDA data reflects a twelve-pip increase in the kiwi-dollar.

There was a 37-pip decrease in the USD/CHF, according to x-rates.com data while OANDA data reflected a ten-pip increase in the rate.

Another notable price change was the decrease in the USD/JPY.  X-rates.com data reflects a 5,373-pip fall in price.  OANDA reported a 3,155-pip fall in the USD/JPY.

So, over the last twenty-four period I must ask whether the Federal Reserve, arguably the most important of the world’s central banks due to the dollar’s reserve currency status, may have said something that has traders questioning their faith in the dollar?

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Is Powell selling the dollar well?

It is a holiday in the United States so the Federal Reserve System is closed.  This means that there is a reduced chance of narrative on the state of the US dollar seeping into the consciousness.  The last sales pitch about the dollar came last week from Federal Reserve System chairman Jerome Powell during remarks made at the Banco de Espana Fourth Conference on Financial Stability.

Mr Powell assured the audience that the US banking system is sound and that while economic activity took a significant hit in 2022, the economy in 2023 is growing moderately. 

On the labor market front, the Fed is seeing an easing in nominal wage growth and while unemployment has ticked up, it is still historically low.

Inflation is still running above the Federal Reserve’s two percent inflation goal.  Mr Powell cited U.S. Bureau of Economic Analysis data that showed core prices from the personal consumption expenditure index rising 4.7% year-over-year.

And those inflation pressures are exacerbated by increasing interest rates moving through the credit markets.  The increases in interest rates are being helped along by the increases over the past 16 months in the federal fund target rate range now at 5.00% to 5.25%.

While Mr Powell did not speak directly to demand for the dollar, I can see why some traders would be spooked by Mr Powell’s assessment of the economy and the economy’s impact on dollar demand.  Higher interest rates and yields may attract traders to dollar denominated instruments but inflation may erode purchasing power.

I will give Powell credit for this. His pitch, at least in this speech, was pretty much balanced and transparent.  He could not put too much of a happy face on markets that consumers are finding increasingly painful.

Alton Drew

4 July 2023

 

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