FOMC Decides Rate Outlook:

FOMC almost certain to leave rates unchanged in light of stubborn inflation, robust jobsSummary of economic projections likely to validate market perceptions of a delayed first rate cutA hawkish Fed message may extend the dollars recent ascent but the inflation data may complicate matters in the lead up

Fed to Stay the Course and Delay Timing of First Rate Cut

The Fed’s Federal Open Market Committee (FOMC) is overwhelmingly expected to keep interest rates unchanged after the two-day meeting ends on Wednesday - when the official statement and summary of economic projections are due. A real mix of fundamental data has complicated the outlook for the US economy and dented confidence amongst the rate setting committee that inflation is heading towards the 2% target. Most observers will focus on the Fed’s updated dot plot to gauge the path of potential US interest rates.

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Inflation Shows First Inkling of a Return to 2% Trajectory - Not Enough to Restore Confidence

The committee is likely to deliver a similar message to the May meeting, maintaining restrictive monetary policy until they feel confident inflation is moving towards 2%. April’s year-on-year inflation print provided the first move lower since January, with Q1 synonymous with hot, rising inflation.

To make things more interesting, the May CPI data is due mere hours before the Fed statement, offering markets a catalyst ahead of the meeting. Services inflation will attract a lot of attention and more importantly, super core inflation (services inflation less housing and energy) as the Fed has placed great importance around this figure as a highly relevant gauge of inflation pressures in the economy.

US Headline CPI Year-on-Year Change

Another source of anguish for the Fed has been the month-on-month core CPI print which failed to move notably below the 0.4% level until the April data – revealing little let up in price pressures.

US Core CPI Month-on-Month

Fed Dot Plot Likely to Draw the Most Attention

Markets have moved away form a potential September rate cut after Friday’s bumper NFP surprise and now fully price in a 25 basis point cut in December, essentially wagering the Fed will only cut once this year.

Market Implied Basis Point Cuts for 2024

However, markets are expecting a downward revision from the Fed but the jury is out as to whether the Fed will trim their forecasts back by a single cut or as much as two cuts which would align the Fed with the market view.

US growth forecasts will also be updated at a time when US GDP has moderated notably since the 4.9% in Q3 2023. Q1 GDP disappointed massively when compared to estimates but the Atlanta Fed’s forecast of Q2 GDP has recovered strongly, to 3.1% (annualised), suggesting the economy is on track for a strong rebound. It is important to note the Atlanta Fed’s forecast takes into account incoming data and has not anticipated the remaining data for June which will likely impact the actual figure.

US Dollar’s Continued Ascent Reliant on Inflation and the Dot Plot

The US dollar surged higher on the back of Friday’s impressive NFP print. However, the longer-term direction of travel remains to the downside as there remains an expectation that interest rates will have to come down either this year or next as the economy is likely to come under strain the longer it operates under restrictive conditions. This assumption limits the dollar's upside potential unless inflation data persistently surprises to the upside. Nevertheless, the shorter-term move witnessed in the dollar could extend if the Fed foresee just a single rate cut this year.

A lower CPI print on Wednesday could see the dollar ease as inflation remains the chief concern for the Fed but recent prints have not been awfully helpful, suggesting a sharp drop is a low probability event. Given that markets anticipate just one rate cut this year, the greenback may pullback in the event the Fed trims its rate cut expectations from three to two for 2024. 105.88 remains the level of interest to the upside while 104.70, the 200 SMA, and 104.00 remain levels of note to the downside.

US Dollar Basket (DXY) Daily Chart

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SP 500 Consolidates at Fresh High Ahead of the FOMC Meeting

US stocks appear to be cautious ahead of the FOMC meeting after reaching another all-time-high. While unconfirmed, the index could potentially be building up some negative divergence (bearish signal) as price action makes a higher high but the RSI appears to be in the process of confirming a lower high.

A dovish Fed outcome is likely to refuel the impressive equity performance to another high but a lower revision to the dot lot could weigh on stocks and send the index lower. In that scenario, 5260 and the blue 50-day simple moving average (SMA) appear as levels of interest to the downside.

SP 500 Daily Chart