This week, key data on inflation growth will be published in the US. The main focus of traders in dollar pairs will be on the Consumer Price Index, which will be released tomorrow, a day before the announcement of the results of the June meeting of the Federal Reserve. The dynamics of other inflation indicators (the producer price index, the import price index, and the University of Michigan consumer sentiment index) are also important, especially if the Fed leaves the door open for further tightening monetary policy.
Inflation and the Federal Reserve
If we look at the preliminary forecasts regarding the dynamics of the indicators above, an obvious conclusion can be drawn: experts expect a slowdown in inflation in the US. And if the reports come out at least at the forecast level (not to mention the “red zone”), hawkish expectations regarding the Fed’s future actions will noticeably weaken.
Thus, the overall consumer price index in May should decrease significantly to 4.1% y/y (from the previous value of 4.9%). The core index, excluding food and energy prices, should also demonstrate a downward trend, slowing down from the April value of 5.5% to 5.2% y/y.
It should be noted that even if the CPI surprises market participants with unexpected growth, this fact is unlikely to significantly impact the situation in the context of the June Fed meeting. According to the CME FedWatch Tool, the probability of a rate hike this month is only 25%. However, a “green tint” in the release could tighten the rhetoric of the accompanying statement, which may contain hints of possible monetary policy tightening in July.
It is worth noting that, according to some analysts (particularly MUFG Bank), the Federal Reserve will pause in June but will indicate that it is just a pause, not the end of the current rate hike cycle. Thus, the central bank will leave the door open for another rate hike, possibly in July. In this regard, MUFG economists emphasize that particular attention should be paid to core inflation dynamics. If this report component stays in the “green zone,” a rate hike in July will be on the agenda. Returning to the CME FedWatch Tool, it should be noted that the probability of a 25-basis-point scenario being realized next month is 51%. Suppose the pace of consumer price index growth accelerates (especially concerning the core CPI). In that case, this probability will increase and could support the dollar, even if the Fed maintains the status quo in June. Conversely, a “red tint” in the release will reduce this probability, putting additional pressure on the greenback.
Producer Price Index and Import Price Index
Equally important are the other inflation reports to be published this week. For example, the Producer Price Index, which will be released at the start of the US Wednesday session. According to forecasts, it should also reflect a downward trend. Experts believe that the overall PPI in monthly terms will come in at -0.1%, and yearly, it will be at 1.5% (the indicator has consistently decreased for ten consecutive months, and May will be the 11th month). The core producer price index should demonstrate a similar trend. Every year, it is expected to decrease to 2.9% (from the previous value of 3.2%). In this case, it will be the fourteenth consecutive decrease in the indicator. For comparison, it is worth noting that in March of last year, the core PPI was 9.6%.
On Thursday, we will learn about the dynamics of the import price index. This indicator can be an early signal of changing inflation trends or a confirmation of existing trends. In this case, it is more likely a confirmation. According to general forecasts, the monthly indicator will return to negative territory, reaching -0.6%. On an annual basis, the index has been below zero for three consecutive months, and in May, it is also expected to remain in negative territory (-5.8%).
Conclusions
This week, the EUR/USD pair will react to the outcomes of the Federal Reserve and European Central Bank meetings and the dynamics of US inflation. Moreover, key reports such as the Consumer Price Index and the Producer Price Index will be released even before the announcement of the June Federal Reserve meeting results.
Considering the upcoming events, EUR/USD traders are cautious and are not breaking out of the price range of 1.0650–1.0770, within which the pair has been trading for three consecutive weeks. However, given the significance of the inflation releases (not only in the context of June but also in the context of the July Federal Reserve meeting), tomorrow, June 13, the pair may attempt to break out of the price corridor mentioned above. This is especially true if the Consumer Price Index (especially the core CPI) significantly deviates from the forecasted course.
In such uncertainty, it remains advisable to maintain a wait-and-see position on the EUR/USD pair.
The material has been provided by InstaForex Company – www.instaforex.com
This week, key data on inflation growth will be published in the US. The main focus of traders in dollar pairs will be on the Consumer Price Index, which will be released tomorrow, a day before the announcement of the results of the June meeting of the Federal Reserve. The dynamics of other inflation indicators (the producer price index, the import price index, and the University of Michigan consumer sentiment index) are also important, especially if the Fed leaves the door open for further tightening monetary policy.
Inflation and the Federal Reserve
If we look at the preliminary forecasts regarding the dynamics of the indicators above, an obvious conclusion can be drawn: experts expect a slowdown in inflation in the US. And if the reports come out at least at the forecast level (not to mention the “red zone”), hawkish expectations regarding the Fed’s future actions will noticeably weaken.
Thus, the overall consumer price index in May should decrease significantly to 4.1% y/y (from the previous value of 4.9%). The core index, excluding food and energy prices, should also demonstrate a downward trend, slowing down from the April value of 5.5% to 5.2% y/y.
It should be noted that even if the CPI surprises market participants with unexpected growth, this fact is unlikely to significantly impact the situation in the context of the June Fed meeting. According to the CME FedWatch Tool, the probability of a rate hike this month is only 25%. However, a “green tint” in the release could tighten the rhetoric of the accompanying statement, which may contain hints of possible monetary policy tightening in July.
It is worth noting that, according to some analysts (particularly MUFG Bank), the Federal Reserve will pause in June but will indicate that it is just a pause, not the end of the current rate hike cycle. Thus, the central bank will leave the door open for another rate hike, possibly in July. In this regard, MUFG economists emphasize that particular attention should be paid to core inflation dynamics. If this report component stays in the “green zone,” a rate hike in July will be on the agenda. Returning to the CME FedWatch Tool, it should be noted that the probability of a 25-basis-point scenario being realized next month is 51%. Suppose the pace of consumer price index growth accelerates (especially concerning the core CPI). In that case, this probability will increase and could support the dollar, even if the Fed maintains the status quo in June. Conversely, a “red tint” in the release will reduce this probability, putting additional pressure on the greenback.
Producer Price Index and Import Price Index
Equally important are the other inflation reports to be published this week. For example, the Producer Price Index, which will be released at the start of the US Wednesday session. According to forecasts, it should also reflect a downward trend. Experts believe that the overall PPI in monthly terms will come in at -0.1%, and yearly, it will be at 1.5% (the indicator has consistently decreased for ten consecutive months, and May will be the 11th month). The core producer price index should demonstrate a similar trend. Every year, it is expected to decrease to 2.9% (from the previous value of 3.2%). In this case, it will be the fourteenth consecutive decrease in the indicator. For comparison, it is worth noting that in March of last year, the core PPI was 9.6%.
On Thursday, we will learn about the dynamics of the import price index. This indicator can be an early signal of changing inflation trends or a confirmation of existing trends. In this case, it is more likely a confirmation. According to general forecasts, the monthly indicator will return to negative territory, reaching -0.6%. On an annual basis, the index has been below zero for three consecutive months, and in May, it is also expected to remain in negative territory (-5.8%).
Conclusions
This week, the EUR/USD pair will react to the outcomes of the Federal Reserve and European Central Bank meetings and the dynamics of US inflation. Moreover, key reports such as the Consumer Price Index and the Producer Price Index will be released even before the announcement of the June Federal Reserve meeting results.
Considering the upcoming events, EUR/USD traders are cautious and are not breaking out of the price range of 1.0650–1.0770, within which the pair has been trading for three consecutive weeks. However, given the significance of the inflation releases (not only in the context of June but also in the context of the July Federal Reserve meeting), tomorrow, June 13, the pair may attempt to break out of the price corridor mentioned above. This is especially true if the Consumer Price Index (especially the core CPI) significantly deviates from the forecasted course.
In such uncertainty, it remains advisable to maintain a wait-and-see position on the EUR/USD pair.
The material has been provided by InstaForex Company – www.instaforex.com
Related Posts: