Spectrum FX Daily Report

As anticipated, there was no change in policy following this week’s FOMC meeting. Chair Powell welcomed Wednesday’s inflation data during his press conference, which showed that US core inflation had dropped to a fresh three-year low 3.4% in May. The statement was also tweaked, noting that there had been ‘modest further progress’ on inflation, rather than a ‘lack of further progress’. Interestingly, however, the bank’s inflation projections were nudged marginally higher - PCE inflation is now seen ending 2024 at 2.6% (2.4% in March), with the core PCE forecast raised to 2.8% (from 2.6%).

The big talking point was the bank’s updated interest rate projections. The median dot for 2024 was revised higher, as anticipated, and is now consistent with just one rate cut this year (down from three in March). While we were pencilling in two cuts, it remains a close call, with eight voting for 2 cuts, while the remaining eleven were in favour of either 1 cut or no change. Markets seem to be of the view that it wouldn’t take much to shift the balance in a dovish direction, with futures back pricing in 50 basis points of Fed cuts by year-end. This can perhaps explain the lack of a more significant move upwards in the US dollar on Wednesday evening.

With the Fed stressing that it remains in data-dependant mode, upcoming inflation prints remain key to the near-term trajectory of the US dollar. Wednesday’s CPI report for May will have been welcomed by FOMC officials. Both the main and underlying rates of consumer inflation are now running at three-year lows in annual terms. Price momentum also appears to be easing, with monthly inflation flat for the first time since July 2022, while the monthly core measure posted its smallest gain since August 2021 when rounding to two decimal places. We will be awaiting the May PCE inflation data (28/06), the Fed’s preferred measure of price pressures, for signs of a similar downtrend.

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