The Fed may or may not actually cut interest rates in September. The deciding factor will be how robust macroeconomic data (namely, inflation and the labor market) looks at that time. That's why all eyes will likely be on today's US labor market report for July.

Certainly, there are signs of weakness in some areas of the US labor market, particularly in cyclical sectors like manufacturing and business services. While the June report shows a fairly good figure (+147,000), a closer look reveals mixed results. However, there are no signs of a slowdown, notes Commerzbank FX analyst Antje Praefcke.

Fed opponents raise concerns about politicization

"According to Powell, the labor market is largely balanced, although downside risks are clear. A moderately tight monetary policy is appropriate given the solid labor market and above-target inflation. It remains to be seen how rates will impact inflation. Therefore, if the data doesn't point in the right direction, a September rate cut could be in jeopardy.

Although the market has already reduced its expectations following Wednesday's Fed meeting, it will likely have to make further adjustments if future macro data continues to erode the likelihood of a rate cut. In that case, the dollar could even strengthen slightly more in the short term."

In the medium term, the behavior of the two dissenting members of the Board of Governors (Bowman and Waller) could play a role, as could the extent to which this could influence the Fed's monetary policy in general. Powell has clearly positioned himself strongly in favor of the independence of the Fed's interest rate decisions, despite the US president's insulting comments.

However, I think the voting behavior of the two dissenting members leaves a bad impression, as it raises suspicions that they are trying to position themselves on Trump's shortlist of candidates to replace Powell as "dovish, willing to cut rates."

In the short term, a "politicized stance" might serve personal ambitions. However, I doubt it will bolster one's reputation as an independent central banker. It's also questionable whether the potential leadership of one of the two dissenting members on the Board would necessarily lead to a more dovish Fed.

Furthermore, the remaining governors could become dissidents in the future—Bowman and Waller have already crossed the threshold—and vote against a cut, precisely to strengthen the Fed's independence. A kind of "internal power struggle" within the Board could emerge. A more politicized Fed and internal power struggles would initially be negative for the dollar, as markets favor an independent central bank. (alg)

Source: FXstreet