A new analysis from the Danish central bank paints a sobering picture. The latest inflation reports have all had a calming effect. That said, the report does signal some glimmer of hope for an earlier-than-expected interest rate cut by the U.S. Federal Reserve. Assuming inflation data continues in a favorable direction, this cut would happen as early as the end of July. Global investment funds in Canada and Europe are increasing their dollar hedges. This action is a more direct reaction to the sharp and unpredictable currency movement.
As we sit at the precipice of a potential recession, economic indicators are a double-edged sword. The expected inflation rate three years out has declined by 0.2% to 3.0%. To make matters worse, the five-year outlook is down by 0.1%, lowering it to 2.6%. Taken together, these figures paint a picture of slowly unwinding inflationary pressures, even as some industries continue to pose a risk. Notably, housing continues to exert upward pressure on overall inflation, with shelter costs reflecting a year-over-year increase of 4%. Now, this critical component is starting to reverse as well, signaling a broader change in the dynamics of the housing market.
In light of these developments, the dollar has not seen significant follow-through buying today. The dollar did get a little stronger yesterday taking on the yen although that’s since stabilized. Investors are still jumpy as clouds of economic uncertainty continue to swirl. The correlation between the dollar and the S&P 500 remains strong, marking the most robust relationship seen in several years. This inverse relationship implies that when the stock market goes up or down, demand for the dollar likewise increases or decreases.
Unsurprisingly then, while the dollar has experienced an unprecedentedly weak year, stock indices have stayed considerably buoyant. When Wall Street is going down, the dollar goes down even faster. This troubling trend not only raises serious questions about overall investor sentiment, but more broadly speaks to global market confidence in the dollar’s long-term value.
The Danish financial house points out that the Federal Reserve should be prepared for volatility in inflation. Yet they too project a general negative trajectory that would result in eventual rate cuts if the present inflationary forces are considered transitory. The Fed’s approach will likely depend on whether recent inflation spikes are a one-time shock or indicative of a longer-term trend.
Market participants await further economic news, as there appears to be almost no new information likely to drive foreign exchange (FX) movements in the immediate future. Every trade recommendation will be shared in the afternoon report. This will provide traders with powerful intelligence to inform their trading strategy in the months ahead.