Dollar struggles on market’s hope of a Powell pivot

The dollar looks set to lose further ground this week after the FOMC’s 75bp hike was, somewhat strangely, interpreted as the start of a dovish pivot and US Q2 GDP disappointed. However, the greenback has rebounded a bit today after income and spending data proved more robust and indicated continued strong price pressures. Our sense is that the risk-on response to the FOMC is largely down to a combination of wishful thinking and stretched positioning. In our view, there was little in Chair Powell’s remarks to suggest policymakers will abandon aggressive rate hikes while inflation remains so far above target. Indeed, he emphasised that policymakers anticipate that bringing inflation back to target will involve ”a period of below-trend growth and some softening of labour market conditions” – an unusual admission from a central bank governor. If we are right that markets have misread the Fed’s intention, the dollar will probably resume its rally before too long.