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Imbalance between Fed policy and US economy grows

Fawad Razaqzada Fawad Razaqzada 15/06/2021
Imbalance between Fed policy and US economy grows Imbalance between Fed policy and US economy grows
Imbalance between Fed policy and US economy grows Fawad Razaqzada
The imbalance between the US economy and Federal Reserve policy grew further today, as producer prices climbed for the sixth straight month in May, adding to inflationary worries, which the Fed continues to dismiss as being temporary. The stock markets are still leaning on the Fed’s side of the argument with US futures hardly moving in reaction to the PPI data, a day after the S&P 500 hit yet another new record high. The US dollar, on the other hand, has shown some strength here and there, but this could be because of short-covering ahead of the eagerly-awaited Federal Reserve meeting.  So, all eyes and ears are slowly turning to the FOMC decision on Wednesday and ahead of it expect to see some choppy price action in an overall risk-on market environment.

FOMC in focus

Will the Fed surprise the market with a hawkish statement or dot plots? I am doubtful even if I don’t necessarily agree with their stance.

Many market observers reckon Fed Chair Jay Powell may wait until the Jackson Hole summit in August to signal a reduction in bond purchases. Any hints of taper on Wednesday would therefore come as a surprise, which could see the markets turn volatile. However, if it is status quo then we should see the dollar come under renewed pressure.

But with inflation running at 5%, unemployment rate at 5.8% and GDP projected at 6.4%, the Fed will have to convince some sceptics that they know what they are doing.
 
US Retail Sales drop but PPI rises

Ahead of the FOMC day, we have had some mixed-bag data today:
 
  • Headlines retail sales fall more than double expectations at 1.3% on the month, in a further sign that Americans have cut back on spending as stimulus support fades. You may recall that in March, sales had jumped more than 11% when the arrival of new stimulus cheques saw consumers splash the cash.  Consumer spending needs to stay strong to convince the Fed the recovery is on a sustainable path.
  • This comes as an index of producer prices that US businesses receive for their products and services (PPI) rose 0.8%, more than 0.5% expected. Core PPI also topped expectations with a print of 0.7% m/m.
  • Meanwhile, industrial production rose 0.8% m/m vs, +0.7% expected.
All eyes are turning to the FOMC decision on Wednesday and ahead of it expect to see some choppy price action in an overall risk-on market environment. Keep a close eye on THIS bear flag pattern on the Dollar Index Daily chart:

DXY
Source: ThinkMarkets and TradingView.com

If the DXY breaks below the channel then expect to see a new low for the year below 89.20.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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Meet our contributors
Fawad Razaqzada
×
Fawad Razaqzada
Market Analyst, London

Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms. He leverages years of market knowledge to provide retail and professional traders worldwide with succinct fundamental & technical analysis. Fawad also offers trading education to help shorten the learning curves of developing traders.
 
His colleagues consider him an expert at reading price action on the charts. This together with his deep understanding of economics and fundamental analysis, and trading experience, puts him in a great position to forecast short term price movements. Fawad covers a wide range of markets, including FX, commodities, stock indices and cryptocurrencies and his comments are regularly quoted by the leading financial publications such as Reuters and Market Watch. In addition to ThinkMarkets, Fawad also provides analysis and premium trade signals on his own website at TradingCandles.com.
 
 

Carl Capolingua
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Carl Capolingua
Market Analyst, Melbourne

Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions. Specialising in Australian and US stock markets in particular, Carl uses a top-down approach to assess the global macro picture before using both technical and fundamental techniques to select stocks. He regularly appears as an expert commentator on a number of media outlets throughout the Asia-Pacific region.
 
 
 

Kearabilwe
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Kearabilwe Nonyana
Market Analyst, South Africa

Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives. His career in the financial markets has seen him hold various positions in global investment banks and global CFD and Spread betting firms. He has deep interest in using quantitative methods to help him understand and teach the fundamental drivers of asset prices.
 
 
 

Fawad Razaqzada
Fawad Razaqzada
Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms.
Carl Capolingua
Carl Capolingua
Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions.
Kearabilwe
Kearabilwe Nonyana
Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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