Brace yourself for the interest rate war

The US central bank (Fed) did not pull the interest rate puller on Wednesday evening, June 19, but does hint that it will do so in 2020. This allusion was enough to set the dollar moving.

It's been a long time since a Fed meeting turned up fireworks. In the past, the bank sometimes misled the markets, for example by suddenly raising interest rates by 0,25%. However, today that is unthinkable. Such a move would shake the stock and currency markets to their foundations. Instead, it has become a game to decipher the words of Fed chairman Jerome Powell as best you can. This time all attention was focused on the word 'patience'. Or rather the lack of it.

patience has run out
According to Powell, the US economy is in pretty good shape and inflation is slowly approaching 2%. The emphasis is on slow, because the bank predicts inflation of 1,5% to 1,8% for the current year. The Fed chooses to wait for developments. That is a big difference with the previous meeting, because then the bank chose to wait for developments with patience. The omission of that one word caused the dollar rose for a while.

The Fed has every reason to keep its finger on the interest rate trigger. The trade war with China is now starting to take its toll on the American industrial, agricultural and export sectors. In addition, 'job growth' slowed sharply in May. In total, 75.000 jobs were created. This is not even half of what economists were counting on (185.000). The official line of the Fed is that interest rates will remain at current levels in the second half of the year. Economists and investors think so anders Because in the CME futures market, traders think that the chance of a rate cut before the turn of the year is more than 90%.

currency dispute
Policymakers expect an interest rate cut in 2020 to be followed by an interest rate hike in 2021. In short: that is a different prospect than that outlined by Mario Draghi, the president of the European Central Bank (ECB). Draghi hinted at a possible interest rate cut and new stimulus measures. Draghi's allusion was against the sore leg of US President Donald Trump, who accused the ECB of keeping the euro artificially low.

For now, however, there is little artificial about the disappointing growth and inflation in the eurozone. Despite the small decline in the first weeks of June, the exchange rate against the euro is still hovering around its highest point in almost 2 years. The real turnaround will only come once the Fed really pulls the interest rate puller.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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