The American dollar has already received a real, not imaginary blow, probably for the first time in recent months after Fed member of the Federal Reserve Bank of St. Louis James Bullard said in his speech that lowering interest rates in the near foreseeable future may be justified.
Bullard himself has a "dovish note" in the last post-crisis years and even during the interest rate increase cycle, which had already begun under Janet Yellen. It was never seen in the supporters of the Fed's monetary tightening. Therefore, his statements earlier were often ignored by the markets but what he said on Monday lays on fertile soil as they say.
Investors are confident that the US economy will continue to slow growth. Hence, its slowdown is already predicted in the second quarter to 1.1% with a steady growth of 3.1%in the first. If this is confirmed and in our opinion, this probability is extremely high against the background of the US trade wars. Thereby, the regulator will have nothing left to do, as it is possible to lower the key interest rate by 0.25% at the September meeting and then by the same most quarter percentage point in December.
An additional incentive for such actions will be the need to feed the stock market at the beginning of the actual election campaign of Donald Trump and his competitors at the end of this year. It is not a secret that the American president connects his rating almost directly with the dynamics of the local stock market. Thus, the coming decrease in interest rates will become not only an economic factor but also a political one.
Assessing such prospects, we believe that if Fed Chairman Jerome Powell hints at such a possibility in his speech, then we can expect the rally of the American stock market to start. Meanwhile, the dollar continues to weaken, which has already begun. We believe that nothing can prevent this since the dollar with this scenario will actively begin to be used as a funding currency. But at the same time, the rally may be limited if the markets again concentrate on the likely failure of US-China trade negotiations.
Forecast of the day:
The EUR/USD pair is trading below a strong resistance level in the wake of expectations of the coming easing of the Fed's monetary policy but there will be more ECB meetings ahead, which could put pressure on the euro. In this situation, the pair may adjust to 1.1220 before resuming growth to 1.1300. From a technical point of view, it needs to grow above the level of 1.1260.
The AUD/USD pair rose despite the decision of the RBA to lower interest rates. The obvious prospective weakness of the dollar supports the pair. If the price stays above 0.6965, it can continue to climb to 0.7025. But if this does not happen, the pair may adjust to 0.6935 before resuming growth.