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Hawkish dot plot by the Fed while inflation eased further

Yesterday’s trading was filled with surprises, from inflation to the Federal Reserve’s projections, leading to another period of uncertainty. However, the good news is that inflation remains on the right track.

Indicator Forecast Actual Prior
CPI MoM 0.1% 0.0% 0.3%
Core CPI MoM 0.3% 0.2% 0.3%
CPI YoY 3.4% 3.3% 3.4%
Core CPI YoY 3.5% 3.4% 3.6%

The data in the table shows that the entire dataset came in lower than expected. The month-over-month (MoM) CPI did not increase last month as expected by 0.1%, and the MoM Core CPI, which was expected to rise by 0.3%, only increased by 0.2%.

More importantly, the year-over-year CPI slowed to 3.3%, while estimates were expected to remain stable at 3.4%. This is the lowest reading since February and the second consecutive monthly decrease.

The latest Core CPI YoY slowed down more than expected, dropping to 3.4% in May from 3.6% in April, while a decrease was projected to around 3.5%. This marks the lowest core inflation rate since April 2021. Currently, core inflation is 1.4% above the Federal Reserve’s 2% target. It had peaked at 4.6% above the target in September 2022 when core inflation was at 6.6%.

Fed Dot Plot vs. Fed Fund Futures

The Federal Reserve Dot Plot indicates that members of the Federal Reserve are predicting only one interest rate cut this year, compared to three in the previous meeting. However, the Fed Fund Futures is still pricing in two rate cuts this year: one in November and one in December. The probability of a rate cut in September has dropped to 65%.

However, Powell hinted that the new Consumer Price Index figures may not be fully reflected in policymakers’ latest quarterly projection. Although the committee was briefed, he said that “most people generally don’t” update their projections when such data arrives in the middle of policy meetings. This opens the door for another change in the dot plot in the next meeting, especially if inflation keeps slowing down when June’s data is announced.

Eyes on PPI data today

During the US session today, eyes will be on another set of economic releases including the jobless claims and the PPI, which will likely have a notable impact on the markets, especially if they both miss the estimates.

Indicator Forecast Prior
Jobless Claims 225K 229K
Continuing Claims 1795K 1792K
PPI MoM 0.1% 0.5%
Core PPI MoM 0.3% 0.5%
PPI YoY 2.5% 2.2%
Core PPI YoY 2.5% 2.4%

Today’s data might provide investors with more insights into the projections from yesterday. If the Producer Price Index (PPI) falls short of estimates and unexpectedly slows down, it will likely indicate that the projections from yesterday are outdated and will probably be changed during the upcoming meeting. Additionally, a further increase in Jobless Claims will signal a weakening labor market. Consequently, the probability of a rate cut in September is likely to rise above 80% once again.

DXY lost most of last week’s gains

The US Dollar Index saw a sharp decline yesterday after the release of inflation data. This caused it to lose more than 70% of the gains it had made since Friday, following the US Jobs Report. However, it recovered some of these losses after the Federal Reserve’s decision and stabilized around the 104.70 support area.

Technical indicators suggest a slightly bearish trend, with the Relative Strength Index (RSI) remaining at 50 on the daily chart. If today’s data falls short of estimates, the Dollar Index is likely to revisit yesterday’s low of around 104.27 and potentially retest Friday’s low of around 104.0. A break below that support level would open the door for further declines towards the next significant support level at around 103.75.

Brent above $82

Brent Crude prices rose above $82 during yesterday’s trading, reaching as high as $83.34 before reducing to around $82.50 by the end of the day. According to the time/price method, the bearish relationship between the time and price has come to an end, suggesting a shift in the downward trend. However, a weekly close above $82.00 would be more favorable to confirm a change in trend.

If the price breaks through the initial resistance at $83, it may move towards $83.28 and then possibly reach $84.40.

On the downside, any retracement should be limited above $80. Otherwise, the breakout would be considered fake, and the downside pressure would resume.

 

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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