Maintaining our view for the USD to decline with US rates in 2H
Medium-term bias for a lower USD intact .
Group Research - Econs, Philip Wee13 Jun 2024
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DXY Index initially depreciated by 0.9% to 104.25 on lower-than-expected US CPI inflation. Headline inflation slowed a second month to 0% MoM (3.3% YoY) in May from 0.3% MoM (3.4% YoY) in April and core inflation to 0.2% MoM (3.4% MoM) from 0.3% MoM (3.6% YoY). DXY recovered partially after the FOMC meeting, ending the session 0.5% weaker to 104.67.  In line with broad expectations, the Fed predicted a single 25 bps cut this year, fewer than the three cuts projected in March. However, interest rate futures continued to see two rate cuts in September and December. According to the dot plot, four Fed officials favoured no rate cut this year; seven looked for one cut, while eight favoured two cuts. No one predicted a hike to address the sticky US inflation.

During the post-FOMC press conference, Fed Chair Jerome Powell clarified that the rate projections were not a plan and could be adjusted based on incoming inflation and jobs data. Powell affirmed that most Fed officials did not update their forecasts mid-meeting, i.e., yet to factor in yesterday’s lower-than-expected CPI inflation. Interestingly, Powell said the Fed was ready to respond if jobs weakened unexpectedly and considered the recent rise in the unemployment rate as an important statistic. Overall, Powell believed policy was restrictive and effective in bringing the Fed’s dual mandate into better balance, highlighting that policy depended on the totality of data, not just inflation. Given the outsized market reactions to last Friday’s nonfarm payrolls data and yesterday’s CPI data, the market appears to agree.

Against this background, pay attention to US initial jobless claims and PPI data today. Having held above 220k in the three weeks ending June 1, initial jobless claims have returned to the upper half of pre-pandemic levels, i.e., the 200k to 240k range in 2018-2019. During the past Fed cycle, rates peaked in December 2018 before they fell in July 2019. PPI inflation will likely mirror CPI data by declining to 0.1% MoM in May from 0.5% in April. New York Fed President John Williams will moderate a discussion with Treasury Secretary Janet Yellen at the Economic Club of New York. Both will likely agree about inflation falling in the second half of the year while sounding upbeat about the economy.

We maintain our view that the greenback will depreciate on the 50 bps of Fed cuts that we expect in 2H24.

Quote of the day
“However beautiful the strategy, you should occasionally look at the results.”
     Winston Churchill

13 June in history
The US Department of Labor was created in 1888.

Philip Wee

Senior FX Strategist - G3 & Asia
[email protected]


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