In January 2019 Jerome Powell pivoted from a policy of interest rate increases and balance sheet cuts to interest rate cuts and, later that year, balance sheet expansion.
Whilst the sell-off at the end of 2018 was the catalyst for this dramatic U-turn in monetary policy, another was fear of increased tariffs on China, imposed by President Donald Trump. In effect, Trump had been using tariffs to force interest rates lower thereby conducting de-facto monetary policy.
Fast forward to this month and Trump is at it again…
For the last few years Trump has consistently called for interest rate cuts and a weaker US dollar. He sat with the top US CEOs to discuss their concerns and used the platform to accuse other countries of currency manipulation.
However, earlier this month, on Fox news, President Trump seemed to volte face, saying “it’s a great time to have a strong [US] dollar”.
It’s clear to see why Trump might want a stronger US dollar as it is consistent with a higher approval rating which is key for the presidential election in November.
However, the market reaction to Trump’s call for a stronger US dollar was muted. In fact, the US dollar recently weakened to pre-crisis levels. This is consistent with our long-term house view as the surge in liquidity provided by the Fed and improving risk sentiment, as economies re-open, leads to a weaker US dollar.
The Powell Pivot 2.0 is a step too far and it is reassuring to see recent price action validate our current market outlook.
Our investment approach is to focus on the fundamentals, not the headlines, and as such we maintain our house view.
This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Bloomberg, Tavistock Wealth Limited unless otherwise stated.
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