Important calendar events
The dollar plummeted after US inflation showed signs of cooling on Wednesday and the index dropped to 104.7. The dollar rallied on Thursday and the dollar index climbed back to 105.2 as markets had time to digest the Fed’s decision. However, US treasury yields continued to decline, with the US 10-year bond yield yielding 4.25%.
One of the key factors that are driving the dollar right now is the US rate outlook. As expected, the US Federal Reserve kept interest rates unchanged at its policy meeting on Wednesday, within a target range of 5.25% to 5.50%. The US Federal Reserve has held interest rates steady since last July.
Fed chair Jerome Powell reiterated on Wednesday that more evidence of cooling inflation is required before a policy change can be considered. Powell stated that the progress of disinflation was slow in the first quarter of the year, resulting in a delay in rate cuts.
The Fed’s latest dot plot, which is revised every three months, was also released on Wednesday. This is the summary of the central bank’s economic projections and was updated on Wednesday to take into account recent inflation and economic data and to provide estimates of the Fed’s interest rate outlook. According to the central bank’s revised dot plot, Fed officials expect to cut interest rates only once in 2024.
US CPI data released on Wednesday, however, showed that disinflation in the US is finally progressing. Monthly inflation remained the same in May, after rising by 0.3% in April and against expectations of a 0.1% rise. Headline inflation eased to 3.3% year-on-year in May from 3.4% in April, dropping below expectations of a 3.4% print. Core inflation, which excludes food and energy, rose by just 0.2% in May versus 0.3% anticipated. Annual Core CPI came in at 3.4% versus 3.6% expected, its lowest reading in three years.
US PPI data on Thursday confirmed that price pressures in the US are easing. US producer prices dropped unexpectedly in May. PPI declined by 0.2% in May against expectations of 0.1% growth and 0.5% rise in April. Core PPI, which excludes food and energy, remained steady in May, falling below expectations of 0.3% growth and 0.5% growth in April.
Odds of a rate cut in September rose above 70% this week, as markets considered that easing US inflationary pressures outweighed the Fed’s dot plot. Markets are pricing in approximately 25-50 basis points of rate cuts within the year regardless of the Fed’s dot plot, which predicts only one 25 bp rate cut in 2024. The uncertainty around Fed rate expectations is likely to continue in the coming months causing volatility in Forex markets.
Core PCE Price index data showed that inflationary pressures in the US are easing. This is the Federal Reserve’s preferred inflation gauge and may affect the Fed’s rate outlook. Core PCE Price index rose by just 0.2% in April from 0.3% in March against expectations of 0.3% growth. Core PCE came at 2.8% on an annual basis, which was in line with expectations, marginally exceeding March’s print of 2.7%.
The US economy expanded by just 1.3% in the first quarter of the year falling considerably below the 3.4% expansion registered in Q4 of 2023. The US economy is expanding at an increasingly slower pace putting pressure on the dollar, as GDP data have shown expansion by 4.9% in the third quarter of 2023. In addition, the Preliminary GDP Price Index rose by just 3.0% in Q1, which represents a downward revision of 0.1% from the previous estimate.
EUR/USD plummeted from 1.085 to 1073 on Thursday as the dollar rallied. If the EUR/USD pair declines, it may find support at 1.072, while resistance may be encountered near 1.091.
Eurozone industrial output fell unexpectedly In April according to data released on Thursday. Industrial production contracted by 0.1% in April, falling short of expectations of 0.2% after rising by 0.5% in March.
The Euro has been under pressure this week since political turmoil in France led to the announcement of national elections. French President Emmanuel Macron has decided to dissolve the parliament and announce a snap election on the 30th of June, putting pressure on the Euro. On Wednesday, however, signs of cooling US inflation put pressure on the dollar boosting the Euro.
The ECB lowered its Main Refinancing Rate by 25 basis points to 4.25% in June. Markets were anticipating this, however, and a rate cut had been fully priced in.
Eurozone inflation remains sticky and may slow down the pace of future rate cuts. ECB President Christine Lagarde’s statement after the meeting was perceived as slightly hawkish. Lagarde did not give many hints on the ECB’s policy outlook and stated that the central bank’s policy will remain data-driven. Market odds of future rate cuts went down after Lagarde’s statement boosting the Euro.
On the data front, headline inflation in the Euro Area accelerated to 2.6% year-on-year in May up from 2.4% in April and exceeding the forecast of 2.5%. Core CPI, which excludes food and energy, rose to 2.9% on an annual basis in May from 2.7% in April against expectations of a 2.7% print. Inflationary pressures in the Eurozone are not easing as fast as anticipated, which might hold up the ECB’s plans to lower interest rates.
The Eurozone economy expanded by 0.3% in the first quarter of the year, which was in line with preliminary estimates. GDP data for Q4 of 2023 showed that the Euro area economy was stagnant with a GDP print of zero. The EU economy contracted by 0.1% in the third quarter of 2023 and barely expanded in the second quarter by 0.1%, after contracting by 0.1% in Q1.
GBP/USD dropped to the 1.275 level on Thursday as the dollar gained strength. If the GBP/USD rate goes up, it may encounter resistance near 1.289, while support may be found near 1.264.
GDP data released on Wednesday showed that the British economy was stagnant in April after expanding by 0.4% in March. Wednesday’s GDP print, however, was in line with expectations. The British economy slipped into recession last year, contracting by 0.3% in the final quarter of 2023. The British economy remains fragile and may force the BOE to pivot to a more dovish policy.
British labor data released earlier in the week were overall disappointing, putting pressure on the Sterling. The UK jobless rate rose to 4.4% for the three months to April exceeding expectations of 4.3%. In addition, the number of unemployed people in the UK rose to 50.4K in May from just 8.4K in April against expectations of 10.2K. On the other hand, though, average earnings for the three months to April rose to 5.9% against 5.7% anticipated. This is an indicator of consumer inflation and sticky price pressures may prevent the BOE from cutting interest rates.
The BOE kept interest rates steady at its latest monetary policy meeting. The BOE maintained its official rate at 5.25% but showed signs of preparing for a dovish pivot.
Currently market odds of a BOE rate cut at June’s policy meeting next week are very low and even a rate cut in August is considered unlikely. Markets are pricing in a rate cut in September with approximately 75% probability, while a rate cut by November is fully priced in. Rate cut expectations shifted from two rate cuts and a total of 50 basis points of rate cuts in 2024 to approximately 35 bp reduction in rates within the year.
Inflationary pressures in the UK are not easing as fast as anticipated reducing expectations of BOE rate cuts. British headline inflation eased to 2.3% in April on an annual basis from 3.2% in March from 3.4%, exceeding expectations, however, of a more drastic drop to 2.1%. Annual Core CPI, which excludes food and energy, fell to 3.9% in April from 4.2% in March, again surpassing expectations of a 3.6% print.
The BOE had updated its inflation outlook earlier this year, predicting that inflation would drop to the BOE’s 2% target in the second quarter of the year. The BOE’s forecasts were not confirmed, however, which may force BOE policymakers to keep interest rates at restrictive levels for longer.
The Yen weakened on Thursday ahead of the BOJ policy meeting on Friday. USD/JPY edged higher, rising to the 157.3 level. If the USD/JPY pair declines, it may find support near 153.5. If the pair climbs, it may find resistance near 157.7.
The next BOJ interest rate decision is on Friday. The BOJ has already hiked rates once and is expected to keep interest rates steady this week. Reports that the central bank will consider slowing its bond purchases at its policy meeting on Friday are boosting the Yen. BOJ Governor Kazuo Ueda hinted that it would be appropriate to reduce the central bank's bond-buying as it prepares to exit its massive monetary stimulus program.
The BOJ kept all policy settings unchanged at its latest policy meeting, despite the Yen’s recent weakness. The BOJ had pivoted to a more hawkish policy at its previous meeting in March, ending its negative interest rate policy and raising the benchmark interest rate into the 0% - 0.1% range. The Yen continues to weaken as there is still a significant disparity between interest rates offered by the BOJ and those from other major central banks.
On the data front, inflation in Japan remains weak. Headline inflation dropped to 2.2% year-on-year in April from 2.6% in March. BOJ Core CPI dropped to 1.8% on an annual basis in April, falling short of expectations of 2.2%. Low inflation in Japan is preventing the BOJ from raising interest rates putting pressure on the Yen.
Preliminary GDP data for Q1 of 2024 for Japan showed that the country has slipped into recession. Japan’s economy shrank by 0.5% in the first quarter of the year against expectations of a 0.3% drop. Japan’s economy registered a small expansion by 0.1% in the final quarter of 2023, showing that the country’s economy is shrinking. Recession concerns limit the odds of a BOJ hawkish pivot in the coming months.
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Written by:
Myrsini Giannouli
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