The DXY Index appreciated by the same 0.1% pace to 105.13 on Tuesday, clawing back some of the fall from its 106 level at the start of July. There were no surprises from Fed Chair Jerome Powell’s testimony to the US Senate Banking Committee. The Fed looks at inflation and employment data to decide when to lower interest rates. However, Powell did provide valuable insights on the kind of good data needed for the Fed to become more confident about inflation falling to the 2% target. Here, he referred to the decline in inflation during the last seven months of 2023 and the latest declines in April and May.
Hence, all eyes will be on tomorrow’s US CPI data, which consensus sees slowing a third month to 3.1% YoY in June from 3.3% in May for headline inflation and staying unchanged at 3.4% after stripping out food and energy prices. However, pay more attention to the month-on-month changes. The 0.1% MoM and 0.2% MoM that consensus expects for headline and core inflation are considered good data by the Fed. The CPI data will be a leading indicator for the Fed’s preferred price gauges, the PCE deflators, out on July 26 before the FOMC meeting on July 30-31.
Acknowledging the US lawmakers’ concerns regarding the growing risks of keeping rates too high for too high, Powell reiterated that the Fed would respond if employment weakened unexpectedly. He assessed that the US economy was no longer overheated and that the labour market had cooled considerably to where it was before the pandemic. With the unemployment rate scheduled for release on August 2, two days after the next FOMC meeting, the market will take its guidance from jobless claims data over the three Thursdays. Until the data say otherwise, the futures market maintained the odds of a Fed cut in September at more than 70%. If we get good CPI inflation readings tomorrow, DXY should try to push below its 100-day moving average at 104.80.
Quote of the day
“Science is organized knowledge. Wisdom is organized life.”
Immanuel Kant
10 July in history
In 1796, Carl Friedrich Gauss discovered that every positive integer was representable as a sum of at most three triangular numbers.
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