Fed stops dollar’s CPI-related bleed, BoJ next

After a turbulent session, the US dollar finished lower against all its major counterparts on Wednesday. That said, it seems to be licking its wounds today.

The greenback was sold massively yesterday, after the US CPI data revealed that consumer prices stagnated in May, resulting in a decline in the yearly headline inflation rate to 3.3% from 3.4%.

That said, a few hours after the report, the greenback began recovering some of the lost ground as the Fed appeared more hawkish than expected, revising up its interest rate projections to point to one rate cut this year from three in March.

That said, the Fed’s hawkishness was not enough for the dollar to finish the day in the green. Perhaps this was because the inflation data did not allow market participants to take the dot plot in faith. Or possibly, it was Powell’s remarks that regardless of the dots, everyone in the Committee is ‘very data dependent.’

Indeed, according to Fed funds futures, the market is penciling in nearly two 25bps reductions by the end of the year, assigning around a 65% probability for the first one to be delivered in September.

Until September, investors will have to digest a lot of data, and with 8 Fed members already voting for two rate cuts this year, economic releases pointing to further slowdown in inflation could add credence to investors’ view and thereby bring the US dollar under renewed pressure.

Tonight, the central bank torch will be passed to the Bank of Japan. The Bank is expected to keep interest rates untouched, but according to sources, policymakers will consider whether to scale back their Japanese Government Bond (JGB) purchases. The key part here is “will consider whether”, which means that they could decide not to reduce their purchases, at least not at this gathering.

What’s more, although the larger-than-expected economic contraction seems to be putting obstacles on the road to the next rate hike, investors are still assigning a nearly 60% chance for another 10bps hike in July.

Both the report on bond buying and investors’ rate hike bets are setting the hawkish bar very high, which means that there is ample room for disappointment. In other words, if the BoJ underdelivers, the yen is likely to extend its slide, and if dollar/yen gets close to the 160.00 zone again, the risk for another round of intervention could rise.

On Wall Street, both the Nasdaq and the S&P 500 hit new record highs for a third straight day, fuelled by the softer-than-expected inflation data. However, they ended the session off their highs due to the Fed’s hawkish interest rate projections. Both indices closed well in the green, while the Dow Jones finished fractionally below its opening level.

With the market now convinced that the Fed is more likely to proceed with two quarter-point rate cuts than one, and with investors seemingly willing to continue pricing in future opportunities for artificial intelligence (AI), the bulls are likely to continue charging in.