Federal Reserve Policy Supports U.S. Dollar

STOCK INDEX FUTURES

Stock index futures are higher.

Jobless claims in the week ended July 2 were 235,000, compared to market expectations of 230,000.

U.S. based companies announced plans to cut 32,517 jobs from their payrolls in June of 2022, which is the highest reading since February last year, and is a 58.8% increase from the 20,476 cuts announced in the same month last year, according to Challenger, Gray & Christmas, Inc.

The rate of inflation remains the key driver to this market. A likely bottom could come when there are indications that the rate of inflation is slowing, which could influence the Federal Reserve to become less hawkish.

CURRENCY FUTURES

The U.S. dollar index is stronger today after yesterday it hit its highest level against the euro currency in 20 years, as interest rate differential expectations remain supportive.

The Federal Reserve is likely to hike interest rates more than other major central banks, which suggests higher prices for the U.S. dollar.

The euro currency is a little lower on news that German industrial output increased less than expected in May.  Total industrial output, comprising of production in manufacturing, energy and construction, increased 0.2% in May compared with the previous month. Economists had forecast a 0.3% gain.

The Australian dollar is higher on news that Australia’s seasonally adjusted trade surplus rose to a record 15.97 billion Australian dollars (US$10.83 billion) in May.

INTEREST RATE MARKET FUTURES

Yesterday’s release of the minutes from the Federal Open Market Committee’s June 15 policy meeting showed inflation fears drove the larger Fed rate increase in June.

Federal Reserve officials concluded at their meeting last month that they needed to pick up the pace of interest rate increases because the inflation outlook had worsened.

There is a 93.9% probability that the Federal Open Market Committee will hike its fed funds rate by 75 basis points and a 6.1% probability that the rate will increase by 50 basis points at the July 27 meeting.

Federal Reserve speakers today at 12:00 central time are Christopher Waller and James Bullard.

Economic growth is slowing, maybe even sooner than expected, which should allow the Fed to soften its policy stance at some point.

The next surprise from the Federal Reserve, not right away but later this year, will be a shift to less hawkish rhetoric.

Financial futures markets are now predicting the Fed could return to accommodation late in 2023.

The fundamental and technical aspects of the interest rate market futures are improving.

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