US inflation tumbles, Fed seen on hold
A sharp drop in US inflation reported overnight has seen markets almost totally rule out a Federal Reserve rate hike tonight. Market pricing is seeing only a 7.0% probability of an increase in US interest rates (source: Refinitiv).
US headline annual inflation fell by more than expected, dropping from 4.9% in April to 4.0% in May. The market had forecast a drop to 4.2%.
However, core inflation remains high, with the annual rate dropping from 5.5% to 5.3%. This result mirrors a similar issue across the globe – while headline inflation had fallen, core remains stuck at elevated levels.
PBOC move hits CNY
The inflation news saw the US dollar weaken across markets.
The AUD/USD gained 0.2% while the NZD/USD climbed 0.4%.
The Chinese yuan bucked the trend, however. A move by the People’s Bank of China to cut two benchmark interest rates – the reverse repo from 2.00% to 1.90% and the overnight standing lending facility from 2.85% to 2.75% — weighed on the CNY.
The USD/CNY gained 0.2% as it hit new six-month lows.
Fed pause to drive rate differentials
The US Federal Reserve decision will dominate markets with the announcement due at 4.00am AEST.
Financial markets now see the US Fed’s rate-hiking cycle peaking next month.
The view on Europe is different – markets see the European Central Bank continuing to tighten until November next year.
And, explaining the British pound’s recent strength, the Bank of England is forecast to tighten all the way into 2024.
USD lower after CPI
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 12 – 17 June
All times AEST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
