The US dollar (DX-Y.NYB) is digesting Federal Reserve Chair Jerome Powell's latest comments on inflation at the European Central Bank's (ECB) Forum on Central Banking, as well as the rise in job openings from May.

TD Bank Global Head of FX and EM Strategy Mark McCormick sits down with Madison Mills on Catalysts to talk about the Fed's data-centric approach to its interest rate policies going forward.

"And inflation from month to month is going to be very challenging and very volatile indicator. So the way that we keep looking at it is there's no room for error," McCormick tells Yahoo Finance. "So next week's inflation number, if it comes in hot this whole narrative is gone. If it comes in as expected, then we get another inflation print where it's like 'yes, they can still probably go in September.' But again, if it comes in hot, it's like everything is binary now. So the market, it lacks confidence, it lacks motivation in terms of how to trade these themes.

McCormick also weighs in on the ways a second Trump presidency or policies like heightened tariffs could impact the US dollar. In the broader FX (foreign exchange) market, McCormick also comments on the influence France's snap election is having on the euro.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Luke Carberry Mogan.

Video Transcript

Taking a look at the dollar here moving lower just to be on the back of those comments from Fed Chair Jay Powell on the path for inflation as well as that may job openings data coming in a bit higher than expected.

Joining me now to discuss, we got Mark mccormick in studio, he TD Bank, global head of FX and emerging market strategy.

Mark, thanks so much for coming in person.

We appreciate it.

So talk to me about what we are in the greenback movements this morning, obviously in reaction to Powell but also the jobs data.

What does that tell you about how the dollar is trading right now?

There's a couple things, right?

So we had a pretty decent outcome from the French election.

So that was like a big risk that was overhanging market.

So that kind of went as planned.

So there wasn't the worst case scenario.

So there's some dollar weakness coming from that.

Also with Powell, I think market are looking for confirmation bias if they can cut rates at some point this year.

But I think one of the things that is very challenging is they're like, yes, inflation is going in the right direction, the economy is a little bit slower, but the econom economy is coming down from a very hot level and all you're kind of going is from one altitude to the next.

And inflation from month to month is going to be very challenging and very volatile indicator.

So the way that we keep looking at it is there's no room for error.

So next week's inflation number, if it comes in hot, this whole narrative is gone.

If it comes in as expected, then we get another inflation print where it's like, yes, they can still probably go in September.

But again, if it comes in hot, it's like everything is binary now.

So the market is really, it lacks confidence, it lacks motivation in terms of how to trade these themes.

Um And again, the big elephant in the room is what happens with the US election and the inflation outlook and fiscal policy like one rate cut and then maybe, you know, an inflationary move from a new president, is it changes the Fed's calculus for 2025?

Well, that is exactly what I want to talk to you about when it comes to the election.

Former president Trump talking about tariffs when it comes to his potential policies that could impact the dollar.

We spoke with Scott Besson.

He's on Trump's short list for potential Treasury Secretary, people moving forward about tariffs and the dollar.

Let's take a listen.

Traditionally you get a 50% what, whatever the level of the tariff is, you get a 50% appreciation of that amount in the currency.

So it's a 10% tariff.

We get a 5% currency appreciation which takes care of some of the inflationary effects.

So he is basically arguing that Trump's tariffs would lead to upper pressure on the dollar, which would take care of some of the inflationary effects of tariffs.

Interesting argument there.

But from your perspective, I just want to hear what you're thinking about how a Trump presidency could really impact the dollar.

Yeah, there there's also the other side of it which is growth.

So currencies reflect an understanding of one currency versus another currency.

So the the thing that's very challenging is yes, it's inflationary for us consumers.

It's something the FED will have to deal with.

It's also negative for the non us global economy.

So part of the, you know, the framework to think about the dollar is again the other thing that's very important right now is inflation is running above the fed's target.

So we're not in a world where we were in 2016 where central banks were essentially trying to get inflation higher.

Th th this is like I I many people including myself believe we are in a structurally different world post 2020 with a lot of the things that are handing over from 2010, all the to this point where demographics, geopolitics, population growth, structural changes in supply chains, all these things are working towards a higher inflation in area environment.

So it's like what they wanted to achieve was 2% inflation ceiling.

I think you could see that 2% is basically a floor at this point.

So when we think about it, like the tariffs in themselves, one will create inflation in an environment where the fed is already dealing with above target inflation.

They're hoping and forecasting inflation goes back to 2%.

But it's still at 2.6 the way they're, they're tracking it now.

And the other thing is it takes growth away from the rest of the world Europe, China.

And the thing that they do is they counter.

So it's also bad for us growth from that.

It's not gonna weigh on growth as much as it would weigh on European growth.

But you have to think of the inner like the intersection of growth plus inflation and how this has an impact on global corporations supply chains and all those things.

So it's much more complicated than just inflation will go up and the dollar goes up and it offsets it.

And it brings up this question too about monetary versus fiscal policy.

When you think about the euro dollar, for example, what do you think is driving that more?

Is it or is it central bank policy?

It's a mix of both because we're, we've already seen the major central banks, non fed cut.

So we know that the ECB has started, the Bank of England is ready to go.

The Bank of Canada started S and B surprise markets would have cut.

The only central bank that's going in the opposite direction is the boj.

Uh the, the thing here is we just don't know if the fed has enough confidence or will get the right data to be able to cut this year.

Um And so I think a big piece of it is what's driving it is now there's political uncertainty in Europe fragmentation debt levels, France not being able to generate enough growth to offset what could be a dysfunctional government and their ability to kind of create an environment where foreigners feel acceptable to take that level of risk, buying oats or buying Euro or buying European stocks.

All these things are what's driving euro dollar now.

So it's political environment, it's monetary policy, it's relative growth.

But keep in mind, the US offers the highest yield advantage to any other G 10 currency.

What does that mean for the Kerry trade?

The carry trade is interesting because it, it's, it's always been and people fo focus on it as an emerging market strategy.

Turkey, Mexico, Brazil, South Africa, Indonesia, these countries offer and India, they offer higher yields, but you take a higher reward.

Well, to get th to get those yields, you need to take higher risk in an environment of goldilocks where there's no macro volatility.

It's the perfect trait and it's worked two years.

Plus most of these currencies are doing well are energy or commodity exporters.

So they got growth, they got commodities, they got carry, they got the central banks.

Now you're seeing more volatility.

Uh Turkey, I'm sorry.

Uh South Africa, India, Mexico all had surprise.

Elections created volatility.

Now, the US election is, to me, the thing that plus the inflation outlook is gonna generate a lot of volatility and you take those things together and the carry trade doesn't perform well.

But the thing is, is a dollar offers more yield than 62% of the world's major currencies.

So you get a currency that's got better growth that's insulated from global risk shocks one that you get higher yields.

And again, you get the carry in US dollar that you don't get in euro or you don't get in in Switzerland or you don't get in sterling.

So the dollar is now the carry trade in a higher ball environment.

Great insights as always Mark.

Thank you so much for joining us in studio.

We really appreciate it.

This is Mark mccormick here with me in studio.

He is TD Banks, Global head of FX and Emerging Market strategy.