FX FUNDAMENTAL ANALYSIS
The question is why we are seeing the dollar index falling so much when it should be moving higher. This is because traders do not like the idea of the Fed normalising the monetary policy when the economic conditions are still anaemic. Improvements in the inflation and unemployment data have been the key reason for the Fed to increase the interest rate. However, the consumer price index printed a in June and this
lower reading is what puts traders at their wits’ end.
However, the Fed feels confident about the economy and they are comfortable with
in their statement in June.
Chart 2. US Average Hourly Earnings and Retail Sales
to 2.2 percent for 2017 (the previous forecast in March was 2.1 percent) and similarly the committee is optimistic about
the unemployment rate. its
performance. Having said that, there has been some minuscule changes
recent Inflation is
the significant part of the rate hike equation and Janet Yellen, the Fed chairwomen, expects the inflation to fall short of the bank’s target. Therefore, the FOMC has readjusted their expected inflation rate from 1.9 percent to 1.6 percent for 2017 but kept the forecast unchanged for 2018 and 2019.
If lowering inflation is a bearish sign for the dollar then bumping up the GDP growth forecast is a hawkish sign. The Fed nudged the GDP forecast
18 FX TRADER MAGAZINE July - September 2017
The new forecast is for the unemployment rate to fall to 4.3 percent (the previous was 4.5 percent).
I do find these numbers are little troublesome because they do not make sense when you look at the current trend in the economic data which matters the most. The US retail sales number is a good indicator in providing a more precise idea how comfortable investors are with respect to their spending. The US average hourly earning all employees total private yearly percentage data has only one direction since the start of this year and that is to the downside. Chart 2 also shows the retail sales data which is trending in the same direction as the average earning number. So it is safe to say that we have strong
Source: Bloomberg
correlation between the average number and retail sales number since the start of this year. Is this
an environment under
which you could see consumers increasing their spending ? Perhaps that is the underlying question which is making investors whistle in the dark and taking the toll on the dollar index. Certainly no, consumers usually tighten their strap and this brings negative impact for the economy.
The number released in June has taken the steam out of the dollar and it confirmed that consumers are anxious. The fact is that it is not the only retail sales number story which has caused a slump in
the dollar index but another
major factor which has pushed the dollar index lower is the difference between the soft (survey) and hard (actual) data. The sentiment really picked up after Trump won the election and this pushed the soft data higher. However, the hard data failed to meet the expectations and investors
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