Most markets were unchanged after giving back the day’s earlier gains. The DXY Index initially depreciated by 0.3% to 98.5 but rebounded to 99 on the FOMC meeting before ending the session at 98.88, near the previous day’s level. Fed Chair Jerome Powell said that higher tariff expectations have made the Fed warier of continued rate cuts, but he also ruled out a rate hike. Powell noted that higher energy prices from the Middle East tensions do not last. The Fed appeared to place more emphasis on the labour market for a rate cut; it lifted the 2025 forecast for the unemployment rate to 4.5% from 4.4%. Powell played down the significance of the dot plot for rate guidance and emphasized dependence on data.
The Summary of Economic Projections leaned toward stagflation. The Fed lowered its 2025 forecast for real GDP growth to 1.4% from the 1.7% projected in March and lifted those for PCE inflation to 3% from 2.7% and core PCE inflation to 3.1% from 2.8%. Despite the softer-than-expected US CPI inflation released on June 11, the Fed expects more goods inflation this summer from many companies passing the tariffs to consumers. Until it gets more clarity on the size, amount, and duration of the tariffs, the Fed will remain vigilant about preventing any one-time inflation from becoming entrenched.
Powell will likely repeat the Fed’s patient stance when he testifies before the Senate Banking Committee next week on June 25. Until then, US President Donald Trump will likely demonstrate his displeasure over the Fed brushing aside his latest call for a 100 bps cut.
Today, the market has fully priced in a hold at the Bank of England and a 25 bps cut to 0% at the Swiss National Bank. Both central banks will likely refrain from signalling a rate cut at their next meeting on account of the higher oil price due to the escalation in the Israel-Iran conflict. President Trump is keeping everyone guessing about US military involvement despite classic indications of preparation – moving an aircraft carrier, bombers, and tanker planes into position. Russia and China were clearly against US escalation with the former offering to mediate and the latter issuing stern diplomatic warnings, while avoiding direct invention.
Oil prices will remain the driver for currency markets in the short term – USD will be higher when they rise, and vice versa. Longer-term, we expect the USD to resume its decline once the Middle East tensions subside and return focus to Trump’s policies that undermine the greenback.
Quote of the Day
“Peace is not the absence of conflict, it is the ability to handle conflict by peaceful means.”
Ronald Reagan
June 19 in history
In 1910, Father’s Day was celebrated for the first time in Washington.
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