The DXY Index posted its first post-FOMC decline of 0.2% to 101.43 overnight. PCE data suggested that US inflation may have peaked in May. Headline and core inflation matched market expectations at 4.1% YoY and 3.4%, respectively, well above the official 2% target. Following the data release, New York Fed President John Williams identified catalysts for price pressures to cool, specifically highlighting the waning impact of tariffs and falling energy prices as impulses that will soon peak. Williams maintained that the current Fed Funds Rate of 3.50-3.75% is well positioned to restore price stability. However, he pushed the timeline out, expecting inflation to drop to 3.5% by end-2026, hitting a glide path in 2027 before landing on the 2% target in 2028.
The most significant event this month was the preliminary peace deal signed between the US and Iran, which brought Brent crude oil prices below USD 80 per barrel, significantly below its end-April peak of 126.40, and near its pre-war level around 72.40. However, average gasoline prices declined to a three-month low of USD 4.25 per gallon overnight, down 12.3% from their 5.20 peak in May, but above their pre-war low of 3.50, prompting President Donald Trump to order a federal investigation into corporate price gouging.
The futures market has reduced the probability of a September Fed hike to 47.5%, below 50% for the first time following the hawkish June 17 FOMC meeting. On July 1, the market expects June’s ISM manufacturing prices paid index to decline to 79 from 82.1 in May. Chicago Fed President Austan Goolsbee emphasized that core inflation remains too high and takes priority in the Fed’s dual mandate. Nonetheless, markets will be cautious ahead of expectations that nonfarm payrolls, out on July 2, may ease to 115k in June, following the surprise surge to 175k in May. Interestingly, Goolsbee endorsed Fed Chair Kevin Warsh’s decision to scale back the Fed’s forward guidance, declining to comment on whether the Fed would hike in September. Markets will defer to the CPI data on July 14 on how much lower oil prices will ease the sticky inflation argument.
Pay attention to the European Central Bank Forum on Central Banking in Sintra from June 29 to July 1. The main highlight will be the panel discussion on July 1 featuring ECB President Christine Lagarde, Fed Chair Kevin Warsh, BOE Governor Andrew Bailey, and Bank of Canada Governor Tiff Macklem. Following the sharp decline in crude prices in June, the market will be looking to see if the ECB pivots this month’s hike as a one-off move, and whether the Fed, BOE, and BOC lean towards a “high for longer” pause. The market will want to ascertain if the worst-case longer-term energy shock has been avoided, replaced by a grinding structural inflation battle. Central banks will not use lower oil prices as an excuse to cut rates, but rather as a buffer to keep rates restrictive for longer without breaking their economies.
If these major central banks demonstrate a more convergent than divergent monetary stances, the major currencies could start to consolidate after their post-FOMC USD surge.
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