FED will pause in June

US CPI report supports Fed pause!

USD: Softer services inflation should further ease Fed concerns

Following a significant sell-off yesterday triggered by the release of the latest US CPI report for April, the US dollar continues to trade at weaker levels. Primarily, the dollar has shown weakness against the yen, leading to a decline in the USD/JPY pair.

Overnight, the pair reached an intra-day low of 133.89, down from yesterday's intra-day high of nearly 135.50. Among the G10 FX currency pairs, USD/JPY remains highly correlated with US rates.

Market participants have revised their expectations for future Fed rate hikes, causing US rates to decline once again and factoring in potential cuts later this year.

Although the monthly rates of headline and core inflation in the April US CPI report were generally in line with expectations, the report's underlying details offer further indications that inflationary pressures are easing.

In particular, the Fed has recently placed more emphasis on the measure of core services inflation, excluding housing costs, which experienced a more significant slowdown than anticipated, reaching 0.11% month-on-month in April.

MORE EVIDENCE INFLATION PRESSURES CONTINUE TO EASE IN US

Source: Bloomberg, Macrobond & MUFG

Recording its weakest monthly reading since July 2022, the annualized rate of growth has further decelerated over the past six months, dropping to 4.1% from a peak of 7.8% in the preceding six months leading up to June of the previous year. Before the onset of the COVID crisis, the growth rate averaged between 2-3%, indicating that a complete normalization has yet to be achieved. Nevertheless, these figures should instill greater confidence in the Federal Reserve regarding the trajectory of inflation.

The Fed's recently updated policy guidance highlights the importance of data in shaping upcoming policy decisions. In line with my expectations and those of the US rate market, the CPI report reinforces the notion that the Fed will maintain interest rates at their current level in June.

However, amidst the positive developments, there is also some less favourable news as the moderation in services inflation was counterbalanced by a rise in goods inflation. Notably, core goods inflation experienced a significant increase of 0.57%, primarily driven by a substantial 4.45% surge in used car prices. Fortunately, auction prices have sharply declined in April, suggesting that the upswing in used car prices observed in the latest CPI report is unlikely to persist.

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