FOMC Governor Michelle Bowman recently mentioned that if inflation stays stable, she would support lowering the policy rate at the next meeting. This would help align the rate with its neutral level, ensuring a healthy job market. Bowman is open to possible rate cuts starting at the July meeting. She highlighted the importance of assessing risks to the job market and noted that trade policies have minimal effects on inflation.

Trade Policies And Inflation

Tariffs are expected to have a small impact on inflation, while improvements in trade help reduce uncertainty. The ongoing conflict in the Middle East could drive up commodity prices. Despite a strong job market, there are early signs of weakness. The AUD/USD pair bounced back from its lowest level since May, supported by positive global sentiment after a ceasefire announcement between Israel and Iran. The USD is facing pressure, bolstered by renewed expectations of a Fed rate cut in July, affecting USD/JPY and influencing gold prices. The cryptocurrency market also rose as major assets recovered, driven by the ceasefire. However, concerns about the potential closure of the Strait of Hormuz, a vital shipping route, are resurfacing. Trading foreign exchange comes with high risks and leverage, which can result in significant financial losses. It’s crucial to understand these risks and consult a financial advisor when needed.

Shifts In Monetary Policy Expectations

Bowman’s comments mark a noticeable shift from some previous communications. She suggests that the threshold for easing may be lower than markets previously thought. If inflation remains steady or declines, a July rate cut becomes more likely. It’s important to note that she still views the job market as a strong pillar, although some cracks are starting to appear. This suggests that the economy is resilient enough to implement some monetary easing without immediately threatening employment. She downplayed the inflationary effects of trade policies, reducing the emphasis on tariffs. Even as trade disputes continue, their impact on core inflation seems to be diminishing. This may give the central bank more freedom to focus on domestic factors. However, if conflicts in the Middle East escalate, energy markets may feel the pressure again. For now, the resolution between Israel and Iran prompted a global sigh of relief, positively affecting various asset classes. The bounce in AUD/USD was not driven by domestic data. Instead, easing global tensions restored confidence and increased appetite for carry trades. Markets began to expect a more dovish stance from Washington, leading to a pullback in USD strength and a decrease in defensive positions. This trend was supported by reduced safe-haven investments in the yen and a rise in gold as the dollar weakened. These foreign exchange movements illustrate how sensitive current market sentiment is to international news—value is not solely determined by fundamentals. There were also notable effects in the cryptocurrency market, which appears to be increasingly responding to geopolitical changes. However, these digital assets are still influenced by central bank expectations. Their bounce likely indicates a market anticipating looser financial conditions, especially if risks in the Middle East remain controlled. That said, there are still concerns about the possible closure of the Strait of Hormuz. This issue extends beyond oil shipping to affect various logistics and pricing chains. From a trading perspective, the possibility of a Fed policy shift brings both opportunities and volatility. Rate-sensitive assets are already adjusting. Some short-term contracts may be anticipating more dovish outcomes faster than the fundamentals may warrant, creating room for abrupt changes if economic data contradicts these expectations. It’s essential to closely monitor job data, wage growth, and fresh inflation figures before July. Any signals inconsistent with rate cuts could trigger a quick sell-off, especially since positioning has become more one-sided. Using leverage in these markets requires careful execution. Volatility from news or policy changes affects not just foreign exchange but can also ripple through commodities, metals, and sectors linked to policy shifts. Given the close relationship between gold and USD/JPY sentiment, traders making directional bets should be cautious of broader correlation changes during sudden geopolitical events. This environment requires thoughtful evaluation of news, timing, and liquidity when placing trades. Relying solely on rate expectations without considering political risks may lead to unexpected setbacks. Create your live VT Markets account and start trading now.

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