Why US inflation data for May will not affect Fed rate decisions

Although headline core inflation is expected to subside slightly, the US central bank is poised to push ahead with interest rate increases at coming meetings

San Francisco, California. The US labour market seems to be shrugging off signs of a slowing economy and rampant inflation. Bloomberg

Last week’s US non-farm payrolls report was positive and one of the strongest we have seen in a while, all things considered.

The US economy added a better-than-expected 390,000 jobs in May, while the unemployment rate held at 3.6 per cent. The US labour market seems to be shrugging off signs of a slowing economy and rampant inflation, and continues to tighten.

The data was a bright spot on the US economic calendar, while all attention will now turn to this week’s US inflation print.

US inflation data is due on June 10 — it will once again be a key theme based on which markets view price rises through June.

Expectations are for the headline core number to subside slightly — year-on-year core consumer price index (minus food and energy) is expected to come in at 5.9 per cent versus a previous reading of 6.2 per cent. The month-on-month print is also expected to shrink to 0.5 per cent versus a previous reading of 0.6 per cent.

The reading should not move the US Federal Reserve when it convenes next week on June 15. While I fully expect the Fed to remain on its path of raising interest rates over the next few meetings, instead, it will bring short-term volatility into US dollar crosses, particularly if we see a larger CPI print than expected.

Two central banks are holding meetings this week: the Reserve Bank of Australia and the European Central Bank. The RBA is expected to increase rates by 25 basis points — but it will be their policy statement that will hold the key for future Australian dollar pricing.

The ECB, on the other hand, is not expected to increase rates at its meeting on June 9. Instead, it will consider increasing rates as early as July and September.

ECB president Christine Lagarde hinted that the central bank would drag its deposit facility rate (currently at minus 0.5 per cent) out of negative territory by the end of the third quarter. This means that we can expect a 25 bps increase in July and another 25 bps increase in September.

If the ECB comes out with more hawkish action amid rampant euro area inflation, it could spark a fresh buying spree in euro crosses through the summer months, particularly against ultra-dovish currencies.

But how this plays out for EUR/USD is a different story. The Fed has already embarked on its path to increase rates and the US economic recovery is a couple of steps ahead of the euro area. So, any major upsides in EUR/USD will remain limited in the short to medium term.

While technically the death cross — a major bearish technical indicator when the shorter-term moving average dissects below the longer-term moving average — remains in EUR/USD on a weekly chart, I expect this currency pair to make a sustained run towards 1.09, followed by a maximum level of 1.1150 through the summer months. During this time, 1.0630 levels should hold true in the cross.

In the commodity markets, crude prices remain firm and the rally extends into the sixth week despite an announcement by Opec+ that it would increase output last week. The current supply shortage — coupled with an expected increase in demand from the US — keeps energy markets elevated in the interim.

Gold, on the other hand, has remained largely range-bound through the end of May and entering into June. The precious metal should continue trading sideways in the weeks ahead. I see strong support holding at $1,780 levels, while upsides will be capped at $1,920.

Finally, next week sees the release of the Federal Open Market Committee interest rate decision on June 15. Fed chairman Jerome Powell has signalled that more rate increases will follow last month’s 0.5 per cent increase.

Last week, Cleveland Fed president Loretta Mester hinted at a 0.5 per cent increase at next week’s meeting. She said if there is "compelling evidence that inflation is on [a] downward trajectory, then maybe we can go with a 25 basis point hike” at the September FOMC meeting.

This makes Friday’s CPI print even more critical as we gear up towards next week’s FOMC announcement.

Gaurav Kashyap is risk manager at Equiti Securities Currencies Brokers. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti Securities Currencies Brokers