. Dollar Drops as US Inflation Supports Fed's Pause - 13 June

Dollar Drops as US Inflation Supports Fed’s Pause

Dollar Drops as US Inflation Supports Fed’s Pause

13 Jun 2023

Dollar drops as US inflation numbers support the Fed’s pause position

The Federal Reserve is expected to announce a pause in interest rate increases at the conclusion of its two-day meeting on Wednesday, as the dollar dropped on Tuesday as statistics revealed the smallest annual gain in inflation in more than two years.

The euro increased by 0.5% to $1.0810 while the dollar index fell by 0.4% to 103.15. The dollar was trading at 139.16 yen, down 0.3% against the yen.

After rising by 0.4% in April, the consumer price index (CPI) grew by 0.1% last month as petrol prices declined. The CPI increased by 4.0% from May to May of the previous year. Following a 4.9% gain in April, that was the weakest year-over-year increase since March 2021.

The so-called core CPI grew 0.4% in May, marking the third consecutive month of growth by the same percentage.

According to what the Fed has said, the data are likely sufficient for the Fed to maintain rates on hold this month, according to Stuart Cole, chief macroeconomist at Equity Capital in London.

However, this is offset by the fact that the core monthly rate stayed the same at 0.4%, which is too high to be consistent with a 2% inflation target and is amplified by the far more modest decline in the core annual inflation rate. You could well imagine the FOMC using this information alone to support another 25-bp increase.

The probability that the Federal Reserve would decide against raising interest rates for the 11th consecutive time and maintain the benchmark rate at 5.00% to 5.25% on Wednesday has increased to roughly 95%, according to traders of futures linked to the policy rate. Before the data, markets estimated that there was a one in four possibility of a rate hike in June.

In addition, the rate futures market reduced bets on the Fed raising rates in July, which were widely anticipated in markets prior to the announcement.