Traders lock gaze on US inflation and Fed decision

The US dollar traded mixed on Tuesday, extending its gains against the euro, the yen and the franc, but losing some ground versus the kiwi and the pound. Today, the greenback seems to be stabilizing against most of its peers as traders may have adopted a more cautious stance ahead of today’s US CPI data for May and the FOMC decision a few hours later.

Although the Committee is not expected to announce any policy change, investors are probably eagerly awaiting the updated economic forecasts and the new dot plot.

With most policymakers sending a “higher for longer” message lately, the dot plot is likely to be upwardly revised. However, a median dot pointing to two 25bps rate cuts this year may not be enough to lift the dollar, as the market is currently anticipating fewer than 50 basis points worth of reductions.

For the dollar to rally, policymakers may need to signal only one rate cut, or the CPI numbers ahead of the decision may have to point to higher-than-expected inflation. In this case, the dollar could stay strong even if the Fed does not meet traders’ expectations. After all, they may be aware that the numbers will not be incorporated into policymakers’ projections. Having said that, Fed Chair Powell may receive questions about the data at the press conference.

The euro continued to bleed, still feeling the heat of the European elections, with the rise in Eurosceptics and the calling of a snap election in France adding to concerns about the EU’s ability to deepen integration.

On Monday, the first opinion poll published after Macron’s shocking decision revealed that Le Pen’s National Rally (RN) is likely to win but fall short of securing an absolute majority in the lower house of parliament.

This means that the RN could still fail to run the government, which could prove positive for the euro. However, if they do, the euro is likely to stay under pressure for a while longer. Another scenario that could prove negative for the common currency is a completely hung parliament.

For now, attention is likely to turn back to speeches from ECB policymakers as traders try to figure out when the next rate cut is likely to be delivered. Today, they will hear from Vice-President de Guindos, as well as from Governing Council members Shnabel and Nagel.

On Wall Street, although the Dow Jones finished slightly in the red yesterday, both the Nasdaq and the S&P 500 rose to new all-time highs, perhaps driven by a slide in Treasury yields and a surge in Apple shares.

A set of sticky inflation numbers today and a relatively hawkish Fed may be enough to prompt some profit-taking and thereby allow a downside correction. However, should the Fed continue to signal that the next move on interest rates is likely to be a cut, the broader uptrend is likely to stay intact.

What’s more, the fact that Apple's stock rallied after the firm announced new artificial intelligence (AI) features, suggests that equity investors remain willing to continue pricing in future growth opportunities related to AI.