Macro 3 minutes to read

Fed feels the pain from inflation miss

Summary:  Will today's US inflation miss convince Federal Reserve holdouts of the need to take a more dovish policy tack?


For a long time, it seemed as though Federal Reserve chair Jerome Powell was one of the last Federal Open Market Committee members clinging to a hawkish interest rate view. A couple of weeks ago, he appeared to downgrade his opinion after St. Louis Fed president James Bullard called for a “downward policy rate adjustment” in case of a “sharper than expected slowdown.”

Today’s US inflation data may have convinced Powell to capitulate and call for a cut.

May CPI missed expectations. The headline rose 1.8% year-on-year compared to April’s 2.0% y/y increase while Core CPI rose 2.0% y/y (April 2.1%). Fed officials are concerned about stubbornly low inflation and today’s data didn’t help. US Commerce Secretary Wilbur Ross said in a Bloomberg TV interview that “I think it’s quite likely that [the] last increase was, at best, premature.”

The US dollar sank following the inflation report, but the move reversed quickly. Traders are more focused on rising geopolitical tensions and the impasse in the China/US trade dispute. The missile strike that hit a Saudi airport, the Russia/US warship “near-collision" in the Philippine Sea, and rising tensions between Hong Kong and mainland China are a few issues that could spark a wholesale stampede into safe-haven currencies.

GBPUSD traders were scratching their heads after the currency pair spiked to 1.2757 because Boris Johnson said that he wasn’t “aiming for a “no deal” Brexit, but using the threat as a “negotiating tool.”

The intraday GBPUSD technicals are bullish above 1.2730, looking for a break of 1.2760 to extend gains to 1.2820. A move below 1.2720 will retarget 1.2650.
GBPUSD (four-hour, source: Saxo Bank)
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