Originally published by AxiTrader
The big four central bank meetings for June are out of the way and the verdict is in.
The FOMC through its statement, economic and interest rate projections, and in Fed chair Yellen's press conference has set itself apart from the other members of this G4 central bank cabal with a clear message that it is not only set on pursuing a path to higher rates in the US but it is also set to soon begin undertaking negative QE - as it winds down its balance sheet.
The news helped give the US dollar a bid tone - rescuing it from 7-months lows in USD Index terms and against the euro, while it was also bid across almost the entire foreign exchange board.
That the Fed was more hawkish than traders had expected, is juxtaposed against the enduring dovish messages that the ECB earlier in the month and Bank of Japan Friday. Both banks acknowledged that growth - and its outlook - have picked up. But both also have continuing concerns about the lack of inflation in their economies.
The Bank of England is caught somewhere between the two camps, assailed by rising inflation but a weak economy. That too took the market by surprise. GBP is stronger but the headwinds the UK economy faces are myriad and the uncertainty has kept its gained capped.
And it was also the case that the US dollar's gains were capped as it finished the week with a sharp reversal from its lows, but also off its highs.
This lack of follow through is easily explained. Markets simply don't buy the Fed's assertions about the outlook for the US economy, its growth rate or inflation.
Take the relationship between the US dollar index and the Citibank Economic Surprise index for the US which collapsed to -78.6 at the end of last wee. That's its weakest outcome since Jul 2011.
And it is a handbrake on the US dollars recovery - a big one.
The market's lack of belief in the fed's message on the economy is probably best exemplified in recent movements of the 10 year bond and the flattening of the US 2-10 year bond spread. Sure at 1.36% the 2-year rate is up near the highs of 2017. But at 2.157% the 10-year bond is close to the post-election lows and at the same time the bond spread has flattened to just 80 points.
Certainly, at 1.36% the 2-year rate is up near the highs of 2017. But at 2.157% the 10-year bond is close to the post-election lows and at the same time, the bond spread has flattened to just 80 points. That has some commentators wondering about increased chances of a US recession.
But to me, the relatively low level of the US 10-year rate is simply a reflection of this recent weakness in data flow and a lack of conviction - by market participants - that the Fed is either right about the economic outlook or its forecast 5 rate hikes over the next 18 months.
I sense a turn in the US dollar as the Fed stands apart from other central banks. But unless or until the data turns around, and US 10 year bonds start to rise again it's most likely the case any US rallies will find willing sellers.
That makes the 98.5 level - in US Dollar Index terms - I highlighted Friday a big level in the weeks ahead.
Have a great day's trading.