DBS Group Research strategist Philip Wee notes that the US Dollar Index (DXY) has seen its first post-FOMC decline as US inflation data suggest a possible peak. Futures pricing now assigns less than even odds to a September Fed hike, while upcoming US data and the European Central Bank's (ECB) Sintra forum may guide whether major currencies consolidate after the recent USD surge.

Currencies to stabilise after post-fomc frenzy

"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."

"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."

"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."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)