Dollar Down as Fed Downplays Inflation Rise
The US Dollar traded lower against major currencies on the back of the Federal Reserve’s policy meeting on Wednesday. Despite the Fed’s acknowledgment of the economic progress being made, the board still sees that it is not time yet to consider tapering. The bank continues to assess the economic conditions based on the upcoming data.
There were few positive changes in the policy statement, but none of them was enough to support the dollar. The statement dropped out “the spread of COVID-19” and the word “significantly” from the sentence about the “path of the economy” continuing to “depend on the course of the virus.” This reflects the receding uncertainty about the pandemic effect on the economy.
However, the Fed still downplays inflation rise. The statement continued to affirm that inflation’s recent rise largely reflects transitory factors. And despite the ongoing discussions on how to scale back bond-buying, the committee hasn’t made any decisions regarding the timing. During the press conference, Fed Chair Jerome Powell stressed that the economy is still away from making substantial further progress towards price stability and maximum employment.
On the data front, the advance estimate showed that the US economy grew by an annualized 6.5% in Q2 2021, well below market forecasts of 8.5%. Unemployment claims dropped to 400k in the week ending July 24th, near its 16-month low of 368k reached at the end of June. Unemployment claims remained more than double the pre-pandemic average, despite record job openings and economic reopening.
Aussie unchanged Despite Surging Inflation
Annual inflation rose 3.8% in Q2, compared to a 1.1% rise in the previous quarter, data released by the Australian Bureau of Statistics showed. Quarterly data also beat expectations and rose 0.8%. Core inflation, which excludes food and fuel data, rose 1.6% annually and 0.5% quarterly.
Official data explained that the increase in annual CPI inflation reflects some base effects following the introduction of free child care and a record fall in fuel prices in the June 2020 quarter. While the most significant factor behind the recent rise was Automotive fuel which was up by +6.5%.
The recent inflation surge may revive expectations for the Reserve Bank of Australia to consider policy tightening actions sooner. However, given the heightened Covid restrictions, the economic outlook remains uncertain.
The RBA meeting minutes released last week reaffirmed the bank’s central scenario that no rate hike is expected before 2024. The bank is committed to maintaining its highly supportive monetary policy until conditions for hiking rates are met. These conditions include a tighter labour market that generates higher wages. The bank perceives that nominal economic activity hadn’t been positive.
However, the faster than expected recovery in the labor market and encouraging economic conditions caused the members to adjust weekly bond purchases from $5 billion to $4 billion. While a pick-up in inflation and wages growth is expected, the bank expects any rise to be only gradual and modest.
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