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Hello everyone, today XM Foreign Exchange will bring you "[XM Foreign Exchange]: Powell's hawks are expected to support the strengthening of the US dollar, and analysts suggest that the United States and Japan choose the opportunity to lay out long positions." Hope it will be helpful to you! The original content is as follows:
On Thursday, the US dollar index continued to strengthen, and once rose to an intraday high of 98.67. As of now, the US dollar is quoted at 98.81.
A senior U.S. Department of Justice official sent a letter to Federal Reserve Chairman Powell on Thursday, which plans to investigate Federal Reserve Director Cook and urged Powell to move Cook out of the board of directors.
Most Fed officials remain cautious about rate cuts. Bostic: It is still expected that interest rate cuts will be cut this year, and the direction of the labor market is worrying; Schmid: The inflation risk is higher than the employment risk, and the current policy is in a suitable position; Hamake: It does not support the rate cut in September for the time being; Collins: If the outlook for the labor market deteriorates, interest rate cuts may be appropriate in the short term. We cannot wait until inflation is lwcgm.cnpletely clear before considering rate cuts.
Powell's potential successor Brad calls for a 100 basis point cut this year and further cuts in 2026.
The US S&P Global lwcgm.cnprehensive PMI initial value in August was 55.4, a record high of 8 months. Traders reduced their bets on the Fed's two interest rate cuts this year; the number of unemployment benefits increased by 11,000 to 235,000 after quarterly adjustment, the largest increase since the end of May; the number of renewed applicants increased by 30,000 to 1.972 million, the highest since November 2021.
Israeli Prime Minister lwcgm.cnanyahu posted a videoThe statement said he had directed the start of negotiations immediately to release all Israeli detained personnel in the Gaza Strip and end the war on "acceptable conditions for Israel." In addition, he said that the Israeli army's plan to take over Gaza City has been approved.
The United States and Europe have officially finalized the framework of the trade agreement, and the United States imposed a tariff rate of up to 15% on most EU goods, covering automobiles, etc.
Trump and Canadian Prime Minister Carney had a call on trade issues, and the two sides agreed to meet in a short period of time.
15 South Korean business leaders will accompany Lee Jae-ming to visit the United States.
The Trump administration is reviewing all 55 million people holding U.S. visas to determine whether there are violations that can be deported.
Powell will announce the results of the first phase of the policy framework review at the Jackson Hall workshop this week. First, the revisions to the Long-term Goals and Monetary Policy Strategy Statement will be discussed. In this regard, Powell previously said the lwcgm.cnmittee generally supports a re-examination of the adjustment made in 2020, namely a flexible average inflation target and an asymmetric perspective on the labor market.
Reflecting on history, the new policy framework adopted by the Federal Reserve in August 2020 is a significant shift lwcgm.cnpared to the Federal Reserve response function that emphasized the necessity of preemptive action after the Volcker era. However, the driving factors of the 2020 framework disappeared after the impact of the COVID-19 pandemic and have never appeared again. The sharp surge in inflation, along with the risks it poses to inflation expectations and consumer sentiment, and evidence of higher neutral rates, even if still below the pre-GFC, has eliminated the need to target inflation overshoots. Meanwhile, the labor market is generally over-tensioned in 2021 and 2022, reminding us that the Phillips curve is more likely to be dormant than fail.
So, while adopting a new framework in 2020 is not the main factor in the Fed's delay in rate hikes and a sharp overshoot of inflation, it does lead to this result. Therefore, we expect Powell’s speech at Jackson Hall will highlight the Fed’s revisions on the long-term target statement to reflect this reality. Specifically, we expect this speech to call for the revocation of the 2020 revisions and the restoration of the dominant role of monetary policy. This likely means the Fed needs to recognize the risks associated with supply shocks and return to a symmetric view of inflation and labor market goals.
We expect Powell may not send a clear signal this week, but instead emphasize the importance of August inflation and employment reports in setting the next interest rate decision. Both reports will be released before the Federal Reserve meeting in September. If Powell's remarks are not as dovish as market expectations, short-term yields may rise and traders will also lower their expectations for a September rate cut. We will keep the Fed from SeptemberPredictions of interest rate cuts. Of course, our predictions that have not reached a consensus before also have downside risks. A weak August jobs report could force the Fed to cut interest rates even when inflation is high.
In addition, we expect the Fed to abandon the Flexible Average Inflation Target (FAIT). The Fed launched the approach in August 2020, when core inflation has never lasted more than 2% in a decade. Since then, inflation has become more stubborn, with overshooting exceeding the target. Even under the FAIT approach, inflation is still at a fairly high. The core inflation rate has been above the target for the past four years, when Fed officials predicted that inflation would not rebound to 2% until 2028 — that is, inflation has been above the target for seven consecutive years. Nevertheless, the correction to the FAIT method will not be surprising, nor will the Fed's response function be changed in the short term.
Bank of the United States said in a report that the dollar may weaken further as the Federal Reserve appears to be preparing to restart interest rate cuts while inflation remains high. He noted that worse-than-expected non-farm jobs data in July and concerns about Fed independence have driven market expectations of faster and larger rate cuts, although inflation still shows signs of stickiness. "The implementation of potential interest rate cuts at a time of rising inflation has created fertile ground for the depreciation of the US dollar." Bank of America expects the euro to rise from the current 1.1620 to 1.20 at the end of the year and further rise to 1.25 by the end of 2026.
Forex market remains calm, and traders continue to maintain a wait-and-see attitude, waiting for Federal Reserve Chairman Powell's keynote speech at the Jackson Hall Economics Seminar on Friday.
Currently, U.S. interest rate market pricing shows that the probability of a rate cut in the Federal Reserve meeting in September is about 20 basis points. Therefore, market participants are seeking a clear signal from Powell to confirm that the Fed is considering a quick return to rate cuts, thereby providing a basis for current pricing. The reason why the market bet on interest rate cuts is largely based on the weakening of the US labor market. Regarding inflation, the participation in the meeting was uncertain about the impact of tariffs, and many believed that "the full impact of high tariffs would take some time to manifest." Overall, most Fed officials see the upside risk of inflation as a greater threat to its dual mission rather than a downside risk of full employment. Only a few people believe that “the downside risk of employment is significant.”
We believe that since the July non-farm employment report was released, the Fed's risk assessment has shifted in a more dovish direction, which is likely to be reflected in Powell's speech on Friday.
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