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Market Wire:
Soft CPI Data Add Weight to Expectations of Fed Cut

Don Curren June 12, 2019

The US dollar wobbled a bit Wednesday morning after lower-than-expected consumer inflation data for May added yet more weight to the view the US Federal Reserve could cut interest rates in the next few months, an expectation that’s become a key driver in global financial markets.

The euro advanced against the greenback after the release, although it quickly surrendered those gains. The DXY dollar index slumped modestly after the news, but also rebounded.

The all-items Consumer Price Index for All Urban Consumers increased 0.1% in May on a seasonally adjusted basis after rising 0.3% in April, the U.S. Bureau of Labor Statistics reported. That increase, the lowest since January, was consistent with market expectations, but the year-over-year rate of 1.8% before seasonal adjustment fell shy of the 1.9% expected by economists.

The energy index fell 0.6% in May, with the gasoline index falling 0.5% and the indexes for electricity and
natural gas also declining in May, the BLS said.

The index for all items less food and energy increased 0.1% for the
fourth consecutive month, below the expected 0.2% climb.

The all-items index increased 1.8% for the 12 months ending May, considerably lower than the 2.1% anticipated by economists.

Expectations that the Fed will cut interest rates sometime this year are now well ensconced in markets and are the key theme driving US dollar weakness in currency markets.

The US overnight-indexed swaps market was pricing in a roughly 19% chance of a 25-basis-point interest rate cut from the Fed at its next policy announcement on June 19 as of Tuesday afternoon, according to data from the CME Group, and a 62.5% probability of a cut at the next announcement on July 19.

At the moment, the market is running with the “imminent rate cut” narrative, and as long as that remains ascendant, the US dollar will likely be on the defensive.

The greenback could rebound if the market unwinds some of its confidence in Fed rate easing, but it will likely take a sharp deviation from expectations in economic data or Fed rhetoric to prompt such a reconsideration.

Bottom Line: May inflation data that proved even softer on a yearly basis than expected by markets, reinforcing the expectation the Fed could cuts rates fairly soon. The market may be getting carried away with its expectations about rate cuts, but today’s data will only add to its propensity to see Fed easing just around the corner.

Don Curren
Market Strategist and Content Editor


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