Easing US price pressure dampen imminent Fed hike talk
The desk believes that the significantly softer US CPI data for June will lead to a recalibration of rate hike expectations from the Federal Reserve, thereby tempering USD bullishness in the short term. As per the full note from ING, headline inflation printed at -0.4% month-on-month, contrasting markedly with the expected -0.1%, pushing the annual rate down to 3.5% from 4.2%. This shift suggests a longer pause in Fed rate increases, impacting short-term USD positioning as traders adjust their forecasts. With no major economic events impacting the dollar in the next month, this environment is conducive to consolidation around current levels.
What the desk is arguing
The desk posits that the latest US inflation figures point toward a diminished likelihood of immediate Fed rate hikes. Per the full note from ING, the June consumer price index revealed a month-on-month decline of -0.4%, surprising many and reflecting falling prices across several sectors including energy and education.
This downward trend in inflation metrics, particularly core inflation which held flat despite expectations for a rise, supports expectations of a prolonged pause from the Federal Reserve. The shift in rate hike pricing indicates that traders may be overestimating the urgency of policy adjustment, especially given the 3.5% annual headline and 2.6% core inflation rates both representing slower velocities than previously anticipated.
Where it sits in our coverage
Our consensus target for USD/JPY is currently set at 1.075, with a range from 1.04 to 1.12 based on discussions within the firm. Current forecasts include:
This desk perspective aligns closely with jpmorgan, favorably positioned near the upper bound of the target range, while divergent views from bofa suggest a more bearish sentiment overall.
How other firms see it
Several firms such as jpmorgan and barclays are aligned with the more dovish outlook on US rates amidst softening inflation pressures. Conversely, firms like bofa have issued contrary forecasts, suggesting a potential for more aggressive Fed action than currently anticipated.
Traders should also keep an eye on USD/JPY dynamics, closely linked to Fed communication, which could reflect underlying shifts from this latest CPI data and subsequent expectations for monetary policy adjustments in the US.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01June CPI data significantly undershot expectations, indicating potential easing in Fed rate hike timelines.
- 02Annual headline inflation has slowed to 3.5%, with core inflation holding at 2.6%, marking a broad softness.
- 03Traders should be cautious of elevated rate hike pricing in the market, as evidence suggests a prolonged pause from the Fed is possible.
- 04No major economic events in the upcoming month may lead to stabilization in USD positioning.
Market implications
Watch for USD/JPY trading around 1.075 as the market digests these softer inflation metrics. The absence of immediate calendar catalysts suggests a period of consolidation without significant volatility.
Risks to this view
A reversal of the current outlook could occur if subsequent inflation prints unexpectedly accelerate, compelling the Fed to pivot from its cautious stance. Additionally, geopolitical tensions or unexpected developments in global markets may create upward pressure on USD.
Articles Easing US price pressure dampen imminent Fed hike talk Published 14:25 United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download US June consumer price inflation data undershot expectations with the breadth of the softening the particularly encouraging aspect. Fed rate hike pricing has receded, but we still think it is too high. We forecast a prolonged pause from the Federal Reserve James Knightley US CPI for June was lower than expected and led by falling gasoline prices 2.6% Annual rate of core inflation Lower than expected US inflation lower than anyone expected Today's consumer price inflation report for June was considerably softer than expected.
US headline prices fell -0.4% month-on-month versus consensus expectations of a -0.1% outcome, while core inflation (ex-food and energy) was flat on the month versus expectations of a 0.2% increase. To three decimal places, it was a negative print of -0.017% MoM. As a result, the annual headline inflation rate slows to 3.5% year-on-year from 4.2% while core inflation slows to 2.6% from 2.9%.
The details show gasoline prices fell 9.7% MoM, but there were also falls in education & communication of -0.8% MoM, used cars (-0.2%), apparel (-0.6%), medical care fell 0.1% while shelter, the largest component within CPI, rose just 0.1%. New vehicle prices were flat on the month while other goods and services rose just 0.1%. The only real source of strength was recreation (+0.5%), which may reflect the World Cup to a certain extent.
The encouraging aspect of this report is the breadth of the softness – it wasn't steep falls in one or two components that offset robust price increases elsewhere. The chart below shows core inflation metrics with the black line representing 0.17% MoM, which is the run rate required to bring core inflation down to 2% YoY. US core inflation metrics (MoM%, 3M annualised and YoY%) Source: Macrobond, ING "> Source: Macrobond, ING Kevin Warsh testimony says all the right things Federal Reserve interest rate hike expectations had been building in recent days, reflecting the re-escalation of the Middle East conflict, the stalling of shipping through the Strait of Hormuz and the move higher in oil and natural gas prices.
However, today's relatively benign inflation outcome, showing broad-based softening in price pressures, is resulting in a steep reversal with the 10Y yield down 6bp and 2Y treasury yield down 10bp on the back of the headlines. Yesterday, a July rate hike was seen as a coin toss, but right now less than 4bp of a potential 25bp hike is priced. 50bp of hikes had been expected by March next year as of today’s open, but that has since dropped back to 44bp by April. At the same time, we have had the release of the text to Fed Chair Kevin Warsh’s semi-annual monetary policy testimony to Congress, set for 10:00am.
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