US inflation was slightly lower than expected, likely cementing the Fed’s pause at Wednesday’s meeting.
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The US Consumer Price Index (CPI) fell to 4.0% in May, down from 4.9% in April and just below the consensus of 4.1%. This was the lowest level since March 2021. Core CPI fell from 5.5% to 5.3%, in line with expectations.
The decline in inflation indicates that the Federal Reserve’s rate hikes are percolating through the economy and having the desired effect of reducing inflation. That’s certainly good news, but the sharp drop in overall inflation was mainly caused by the drop in food and energy prices. Core CPI, which excludes food and energy, remains stubbornly high, and unless it falls faster, the Fed will have a tough time getting inflation back down to the Fed’s 2% target, which could mean another rate hike in the second half of the year.
Inflation news in the US has gained in importance since the Federal Reserve designated inflation as public enemy number one. Tuesday’s inflation release added weight from today’s Federal Reserve meeting. Fed Chairman Jerome Powell has indicated that the Fed plans to take a break after 11 straight rate hikes. However, some Fed members are hawkish and have said they favor further rate hikes.
Market valuations of interest rate movements have fluctuated wildly in recent weeks the odds of a pause jumped to nearly 100% after Tuesday’s inflation report.meaning a rate hike would be nothing short of a huge shock.
As mentioned, and The Fed is split on whether to pause or continue raising rates. That could force Powell to take a middle path in which the Fed pauses or “skips” rate hikes, but he stresses that this is not the end of the rate-tightening cycle, and the door remains open to more hikes in the coming months.. The rate statement and Powell’s press conference following the rate decision may provide clues about future rate policy.
In the Forex market, i.eThe US dollar retreated against all major currencies on Tuesday except the Japanese yen. The US dollar saw slight losses against the Australian, New Zealand and Canadian dollars. British pound climbs nearly 1% on tepid UK jobs report currency pair GBP/USD in focus.
The US dollar is steady in the European session on Wednesday. There is a high possibility of volatility in the North American session when the Fed announces its rates.
Stock market futures rose slightly on Wednesday. S&P futures rose 0.17% and Nasdaq futures rose 0.24%.