US: Not quite 250 basis points – Commerzbank

Source Fxstreet

Despite the wishes of a certain White House resident, the US Federal Reserve left its key interest rate unchanged at 4.25-4.5% on Wednesday. However, it adjusted its economic projections quite significantly. These indicate expectations of a somewhat stagflationary environment. Growth expectations for this year were lowered from 1.7% to 1.4%, and a slightly higher unemployment rate is now expected, Commerzbank's FX analyst Volkmar Baur notes.

The current environment is not positive for USD

"In contrast, however, the inflation forecast was not lowered, as one might have expected, but raised to 3.0% (from 2.7% in March). In addition, the median forecast of FOMC members is still that key interest rates will be cut by 50 basis points by the end of the year. However, this majority was only very narrow in June. While eight members still see two steps (nine in March), seven members now expect no adjustment at all. In March, only four members held this view."

"This divided opinion could well reflect the pressure the Fed is currently under. On the one hand, recent data pointed to a slowdown in the US economy. Retail sales were weaker again in May than in the previous month, industrial production disappointed, and the labour market is also showing initial signs of slight weakness. On the other hand, however, political attacks from the White House and increasingly from other parts of the government are making it virtually impossible for the Fed to lower key interest rates as a preventive measure, as this would expose it to accusations of influence."

"And independence is, quite rightly, a valuable asset for central banks. It could therefore be said that Donald Trump's verbal attacks are achieving exactly the opposite of what he actually wants. However, it could well be that he is simply laying the groundwork to blame Jerome Powell if the US economy runs into trouble as a result of his questionable foreign trade policy. Either way, this is not a positive environment for the US dollar."

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