ExchangeRates.org.uk - The dollar dipped sharply after the latest US inflation data while risk appetite strengthened and both these factors boosted the Pound in global markets. There was little sustained impact from the latest UK GDP data.
US consumer prices were unchanged for May compared with consensus forecasts of a 0.1% increase with the year-on-year rate edging lower to 3.3% compared with expectations of an unchanged rate of 3.4%. Core prices increased 0.2% on the month compared with forecasts of a 0.3% increase with a larger than expected decline in the annual rate to 3.4% from 3.6% previously.
New vehicles, apparel and transport services prices all posted a monthly decline which helped curb the overall increase in core prices. The data sparked an important element of relief surrounding US inflation trends and markets responded positively. Following the data, markets considered that the chances of a September Federal Reserve rate cut had increased to around 70% from 50% previously with just under a 10% chance of two rate cuts during the third quarter.
There were strong gains for Treasuries with the 10-year yield declining to below 4.30%.
Equities also posted strong gains with US S&P 500 index futures 0.9% higher ahead of the Wall Street open.
Christophe Boucher at ABN AMRO (AS:ABNd) commented; “The CPI data today will bolster the case for a first cut in September so potentially US yields will adjust on the downside with downside pressure on the dollar.”
Lindsay Rosner, Head of Multi-Sector Investing at Goldman Sachs (NYSE:GS) was still relatively cautious surrounding the potential for rate cuts; “While September may be on the table, today would have had to be the first of a handful of inflation data prints that went right, which it did. This is good news, but we will need more of it.”
The Federal Reserve will announce the latest interest rate decision after the European close and there is no doubt that interest rates will be held at 5.50%.
The overall market psychology is likely to be significantly different after the latest inflation data. A strong reading would have increased fear over a hawkish stance by the Fed and Chair Powell and, following the data, there is likely to be more confidence that the commentary will be more balanced. According to Pepperstone Analyst Michael Brown; “the data does lessen the chances of a hawkish shift in Chair Powell's rhetoric at the post meeting press conference.”
Markets will be paying close attention to the latest interest rate forecasts by individual committee members. In the March update, the median projection was for three rate cuts during 2024. This will change in the latest update with expectations that the median will show two or even one cut this year. ING commented; There will be much focus on the dot plots, which are expected to show two instead of three Fed cuts this year. The market prices less than two cuts already this year - meaning that the dollar should not have to rally too far. The comments and guidance from Fed Chair Powell in the latest press conference will also be important.
According to ING; “Chair Powell typically delivers a dovish press conference and the dollar has ended lower on the day over the last four consecutive FOMC meetings. The same could happen today.” MUFG added; “We see no reason (especially if CPI is at least as expected or weaker) for Powell to abandon the view that policy is restrictive enough and will maintain the key message that cuts are coming, but have been delayed. That type of messaging will help curtail dollar strength on a one-dot scenario.”
This content was originally published on ExchangeRates.org.uk
