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The DXY Index remains cautious ahead of today’s FOMC announcement after the release of US CPI data. DXY was barely changed at 105.23 on Tuesday. Monday’s 0.3% rise to 105.15 on France’s surprise snap election announcement was muted compared to last Friday’s 0.8% spike to 104.89 on the higher-than-expected US nonfarm payrolls. The US Federal Reserve should keep the Fed Funds Rate unchanged for a seventh meeting at 5.25-5.50% due to sticky US inflation in the first quarter. Today, the Fed should reduce the three rate cuts projected for 2024 in March’s dot plot, nearer the two cuts we projected for the second half of the year. Futures markets fluctuated between a single cut in September or two cuts in September and December.
Fed Chair Jerome Powell will unlikely expect the Fed’s next move to be an interest rate hike. Before the Fed’s blackout period, San Francisco Fed President John Williams shared Powell’s assessment that inflation will fall in 2H24. Williams reckoned that monetary policy was restrictive and well-positioned to lower PCE inflation to 2.5% this year, slightly higher than the 2.4% pencilled in March’s Summary of Economic Projections. Today, US CPI inflation data, which consensus sees slowing for a second month to 0.1% MoM in May from 0.3% in April, will be released before the FOMC announcement.
While the Fed will be patient in lowering rates to achieve its price stability mandate, the SEP also indicated that inflation need not be at 2% for the Fed to lower policy restriction. Looking at the totality of data, the Fed will note that US GDP growth has cooled to an annualized 1.3% QoQ saar in 1Q24 from the exceptional 3.4-4.9% growth rates in 2H23. Although US nonfarm payrolls were higher-than-expected at 272k in May, so was the unemployment rate at 4% in May, which hit the Fed’s projection for 4Q24.
According to the Fed’s Beige Book report, tight credit standards and high interest rates continued to constrain lending growth. Several Fed districts reported that wage growth was at or normalizing towards pre-pandemic historic averages, with employers experiencing more bargaining power than a year ago. The commercial real estate sector’s uncertain outlook was attributed to the uncertainties regarding the timing of Fed cuts and the outcome of the November US presidential election.
The market is well prepared for the Fed to project fewer, i.e., one-two interest rate cuts this year. Our medium-term view has not changed that the USD will depreciate once inflation resumes its fall for the Fed to prepare the ground for rate cuts. However, the DXY’s short-term outlook is uncertain due to the political volatility in the EUR and GBP ahead of the surprise snap elections in France on June 30 and the UK on July 4. Beyond that, EUR and GBP should be underpinned by their economies exiting technical recessions. The EU Sentix Investor Confidence turned positive in June for the first time since February 2022. European Central Bank President Christine Lagarde signalled that the governing council would likely keep rates unchanged for more than one meeting after this month’s rate cut. The US elections in November will probably matter more, given the recent worries over US fiscal sustainability and de-dollarisation. In Asia, USD/SGD is one of the most correlated currency pairs with the DXY Index, keeping to a 1.33-1.37 range on a DXY’s 102.5-106.5 range.
Quote of the day
“When it is obvious that the goals cannot be reached, don’t adjust the goals, adjust the action steps.”
Confucius
12 June in history
Boris Yeltsin won Russia’s first presidential election with 57% of the vote in 1991.
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