The dollar depreciates on global markets; nervousness prevails on stock markets. Still, the price of oil stays on an upward trajectory and is already above 70 USD per barrel on the London Stock Exchange.
The pound is the strongest of the main currencies. The British currency owes its strength to the result of the Scottish elections, which did not reinforce the independence factions. The space for a further significant increase in the pound's value against the euro or dollar has been exhausted. In its valuation, the positive consequences of the rapid progress of vaccination are already fully taken into account, and the markets do not seem to care about the impact of Brexit and the risk of tensions between London and Brussels.
The dollar exchange rate drops as data weaken
In our opinion, the Fed will not be frightened by inflation itself. It would be more likely to change its stance following signs of overheating in the economy, i.e. a faster-than-expected (in optimistic forecasts) recovery from the pandemic bottom, combined with strong inflation of a primarily demand-driven nature and intensifying wage pressures in the economy. The final piece of the puzzle should be higher rates, in this case: their faster lift-off than currently assumed for 2024. However, so far, the optimism about the future prospects of the American economy has faded slightly, and it translates into a weaker dollar. Firstly, strong growth is no longer its distinctive feature. Secondly, it is not as strong as one could have assumed. The optimists had to take off their rose-coloured glasses and tone down their optimistic forecasts for the US currency.
The latest economic data show that 266,000 new payrolls were created in April against expectations of a million. In the same month, retail sales failed to grow compared to March when they surged supported by gigantic social transfers that are the backbone of Joe Biden's fiscal package. Household sentiment took a dive, and the New York index, which starts the regional economic barometer series, fell marginally. There is no reason to sound the alarm; after all, the growth is strong but less impressive than the market had anticipated at one point.
Fed rhetoric strikes dollar as well
All of the above allows policymakers to stick to familiar rhetoric and declarations of patiently supporting growth. This was expressed yesterday by the Fed Vice Chairman. Richard Clarida directly addressed the April labour market report and named things by name: the data are far from being sufficiently progressive to start a debate on abandoning the crisis policy and ending asset purchases. The economic recovery will be jumpy, ragged and uneven, and the growth path will be full of major twists and turns. In the eyes of the monetary authorities, the best response to this state of affairs is to sustain massive monetary stimulation.
How about price pressures? The highest inflation rates in a decade are largely the result of one-off factors arising from the extraordinary position of the existing tight economy. If removal of bottlenecks from supply chains and an increase in labour availability (currently under exceptional benefits, among other things) fails to suppress inflation, it may require action. It will take time to disprove the thesis that Fed boosts in price dynamics are wrongly regarded as temporary. As a result, a hawkish turn at the June meeting is becoming less and less likely. Even if all the information from the economy were encouraging to it, the response by policymakers would be to refer to the necessity of having a well-established view of the situation.