June FOMC In Focus
Ahead of the June FOMC meeting tonight, market expectations have turned aggressively hawkish. The Fed had been widely expected to raise rates by a further .5%, as per the guidance issued at the last Fed meeting. However, much of the prior guidance was issued on the back of a softer inflation reading in April. CPI was seen cooling by 50% from the surge in March and market speculation had started to shift towards the view that, with inflation moderating, the Fed would look to scale down its rate hikes beyond July. However, since that last meeting, the latest inflation data shows that consumer prices roared back higher once again last month.
Inflation Driving Hawkish Expectations
Annual CPI was seen rising to 8.6% in May, its highest level since 1981. With inflation bouncing back firmly, reinforcing the view that the spike in consumer prices is here to stay, the market is looking to the Fed to take firmer action. These expectations were amplified this week by a report from the Wall Street Journal noting that leaked comments from the Fed suggesting the central bank was considering hiking by more than the projected .5%. Cynics have suggested that the leak was a Fed tactic used to help steer markets towards expecting more aggressive action given the blackout period which sees Fed members barred from comments ahead of the FOMC.
Rising Wave of Central Bank Tightening
The Fed is also dealing with the impact of the rising tide of central bank monetary tightening across the G10. With the RBA, BOC and RBNZ each hiking rates by .5%, a more aggressive hike from the Fed makes sense in order to maintain the effectiveness of hiking. With the ECB now turning hawkish, signalling a forthcoming July rate hike, and the BOE expected to hike rates tomorrow, the pressure is on for the Fed.
Given this new uptick in market pricing for a .75% hike, if the Fed simply sticks with the projected .5% hike initially pegged, USD is likely to come off. Indeed, even if the Fed does press ahead with a larger .75% hike, the bigger focus this week is likely to be on forward guidance. Given the debate around a potential post-July pause, the market will be looking to see if the Fed gives this view any weight or actively pushes against it. Again, the former would see USD weaker while the latter would drive USD higher near-term.
Technical Views
DXY
The Dollar Index has broken out to its highest levels since late 2002 this week with price pushing beyond the prior 2022 highs around 105.25. With price continuing higher within the bull channel, and both MACD and RSI bullish, the focus is on a continuation higher through 105.70 to 107.39. However, worth noting bearish divergence in momentum studies. Any reversal back under the prior 2022 highs raises risks of a double top reversal setting up.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.