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Forexlive Americas FX news wrap 17 Jul: Stronger US data keeps the Fed members cautious | Forexlive

The USD is ending the day higher vs the major currencies but in the US session the greenback did fall vs the major currencies. It declined despite largely better than expected US data. Nevertheless, the greenback is still closing higher on the day. Below are the % changes of the USD vs the major currencies:

  • EUR, +0.33%
  • JPY +0.48%
  • GBP +0.04 %
  • CHF +0.49%
  • CAD +0.46%
  • AUD +0.58%
  • NZD +0.25%

Economic data in the US session was mostly positive.

  • U.S. retail sales rose 0.6% in June, far exceeding the 0.1% forecast and rebounding strongly from May’s -0.9% decline. Excluding autos, sales climbed 0.5%, while the control group—a key input for GDP—also rose 0.5% vs 0.3% expected, though the prior month was revised down. On a year-over-year basis, retail sales increased 3.5%. Gains were broad-based, led by e-commerce, motor vehicles, building materials, clothing, and home furnishings. Some of the strength may reflect tariff-driven price increases, as retail figures are not adjusted for inflation. Weakness was limited to health, electronics, department stores, and gasoline. Overall, the data signals resilient consumer demand and positive momentum for GDP.
  • Initial jobless claims for the latest week fell to 221,000, beating expectations of 235,000 and down from the prior week’s revised 228,000. Continuing claims came in at 1.956 million, slightly below the 1.965 million estimate, with the previous week revised to 1.954 million. The data underscores a stable labor market with low levels of firing and hiring, reinforcing the narrative of labor market resilience and no immediate concern for policymakers.
  • The Philadelphia Fed Business Outlook Index surged to +15.9 in July, well above the -1.0 forecast and rebounding from -4.0 in June—the strongest reading since February. New orders jumped to 18.4 from 2.3, and shipments rose to 23.7 from 8.3. The employment index turned positive at 10.3, up from -9.8, indicating strengthening labor demand, while the average workweek also ticked up. Price pressures intensified, with prices paid rising to 58.8 and prices received climbing to 34.8. Although delivery times and inventories declined, future activity indicators suggest that regional manufacturers expect continued growth. Despite its volatility, the report signals solid momentum in the manufacturing sector.

The Fed enters its pre-meeting blackout period at the end of tomorrow, and Governor Adriana Kugler signaled support for keeping rates steady, citing low unemployment and rising price pressures from tariffs. She noted that inflation remains above target, with June PCE at 2.5% and core PCE at 2.8%, both above May levels. Kugler emphasized the need for a restrictive stance to anchor expectations and warned that the full impact of tariffs may still be ahead. Despite political pressure, she offered no support for rate cuts at this time.

San Francisco Fed President Mary Daly said the Fed still has “some work to do” on inflation, even as the economy shows solid growth and a resilient labor market. She noted that while some inflation pressures remain—partly from tariffs—disinflation is occurring in other areas. Daly supports the idea of two rate cuts this year but stressed they shouldn’t be preemptive. She downplayed the importance of whether the first cut comes in July or September, emphasizing the overall direction is toward easing. Daly sees the eventual policy rate settling above 3%, higher than pre-pandemic neutral, and described current financial conditions as slightly restrictive but not overly loose.

Finally, Atlanta Fed President Raphael Bostic, in an interview with the Wall Street Journal, said the economic outlook remains highly uncertain, particularly due to the unclear impact of new tariffs, which could take several months or even quarters to fully play out. He argued that the slow rollout of tariffs justifies a policy delay, as the Fed needs more time to assess inflation and growth effects. Business responses vary, with some firms passing on costs while others absorb them. Bostic noted it’s too early to judge whether tariffs will dent consumer demand or spark a new inflation wave. Like other officials, he expressed skepticism about rate cuts at the July 29–30 meeting, citing the lingering scars of early 2020s inflation as a reason for caution. Despite political pressure, Bostic emphasized that Fed independence is critical, and policymakers must be ready to make unpopular decisions in the economy’s long-term interest.

One of the top candidates, to take over from Fed’s Powell – Kevin Warsh – spoke today on CNBC and was not complimentary of the Federal Reserve calling for a regime change at the Fed.

Below is a summary of his comments:

  • AI and economic potential: Warsh emphasized that artificial intelligence represents a major opportunity to reduce long-term costs and drive economic transformation. He expressed concern that the current Federal Reserve may not fully appreciate this potential.

  • Call for regime change: He argued against continuity at the Fed, stating that today’s central bank is “radically different” from the one he knew in 2006. He believes the Fed lacks credibility and that a leadership change is necessary.

  • Critique of Fed policy: Warsh said the Fed’s monetary policy framework is outdated and has been broken for a long time. He noted that the Fed cut rates last time even when inflation was 50% higher than it is now, which he sees as a policy failure.

  • Concerns about independence and mission creep: He stressed the importance of Fed independence but criticized its engagement in issues like DEI and climate change, which he views as outside its core mandate. He believes these diversions have contributed to poor inflation management.

  • View on tariffs and rate decisions: Warsh blamed current inflation misjudgments in part on tariffs and political influence, suggesting the Fed’s decisions have been distorted by external factors.

  • Monetary policy reset: He stated that a rate cut would be the beginning of needed regime change, not just a technical adjustment. He also believes interest rate policy has been mishandled for an extended period.

  • Fiscal discipline and housing: Warsh warned of an impending housing recession and called for a reallocation of fiscal efforts from politics to the real economy. He asserted that the Fed should exit fiscal and political matters and focus narrowly on its constitutional role.

  • Broader message: He described the current period as a transformational moment and criticized the Fed’s leadership as lacking deep understanding of the present economic dynamics.

In addition to the USD moving higher today, the major US and European stock indices closed higher:

  • Dow industrial average +0.52%
  • S&P index +0.54%
  • NASDAQ index +0.74%
  • Russell 2000+1.20%

Both the S&P and the NASDAQ index closed at record levels (S&P its 9th record close and Nasdaq its 10th record close).

In Europe DAX and France’s CAC both rose more than 1.25% leading the charge:

  • German DAX, +1.52%
  • France’s CAC, +1.29%
  • UK’s FTSE 100 +0.52%
  • Spain’s Ibex +0.78%
  • Italy’s FTSE MIB +0.92%

in the US debt market, yields were mixed/little changed with the shorter and higher in the long around modestly lower:

  • 2 year yield 3.906%, +2.2 basis points
  • 5-year yield 3.992%, +0.7 basis points
  • 10 year yield 4.453%, -0.2 basis points
  • 30 year yield 5.009%, -0.6 basis points
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