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The US Federal Reserve chose to keep interest rates unchanged between 0.25% and 0.5% in July, but many expect fireworks in the months ahead.
The markets expect a rate hike in September, while they also expect UK rates to be cut next week, and indeed anticipate some more quantitative easing.
In theory, when interest rates move in opposite directions, currencies change too. Money tends to flow from the country where rates were cut to the country where they rose. So in this case, the dollar should rise, and the pound fall. Although, in theory, this has been priced in by the markets.
It does not always work like that. When the Bank of Japan announced more monetary loosening recently, the yen actually rose – after a few days. There are other factors at play. In the case of Japan, it is seen as a safe haven, that was why investors ploughed money into the economy of the rising sun, even though theory would have suggested a different outcome.
But now might be a good moment to take stock and look at the US economy.
Last month, US non-farm payrolls rose by an impressive 287,000, this was seen as especially good news as the data in the previous month was something of a let-down. We are due to get the next jobs report on 5 August, it will be watched closely.
Also, next week will see the latest batch of purchasing managers’ indexes tracking the US economy. An early, flash reading picked up nicely, rising to an eight-month high.
US consumer confidence is looking good too; the closely watched consumer confidence index from the Conference Board fell a fraction this week (from 97.4 to 97.3), but it is high by historical standards.
Capital Economics projects US growth of 2.5% in Q2 on an annualised basis.
Then there is US inflation, core inflation (without food and energy) was 2.3% in June.
None of this is spectacular, but it is at odds with the rest of the global economy. And that should have implications for the dollar, and should lead to it rising even further.
