Slight Decline for the Dollar as the Fed Signals a Cut

By:
Michael Stark
Updated: Jun 13, 2024, 14:10 GMT+00:00

The Fed indicated one cut to the funds rate this year at its meeting but is still waiting for lower inflation.

US Dollar, FX Empire

In this article:

The latest meeting of the Federal Reserve (‘the Fed’) on 12 June didn’t bring any major surprises to markets. The dot plot showed one likely cut this year and four in 2025. This article summarises recent news and data affecting the US dollar and looks briefly at the charts of GBPUSD and USDJPY.

Despite the signal of one cut this year being quite clear, participants still aren’t sure when this might occur, with the probability of a cut in September having increased somewhat since last month:

Source: CME FedWatch Tool

Although 60% expecting at least one cut by September is a clear majority, it’s not such a large one that this outcome is very likely yet. The expectation of a cut according to CME FedWatch Tool rises to around 75% in November and 92% in December.

However, expectations of a cut have been consistently pushed back throughout 2024 so far, so it’s reasonable to expect that they could be pushed back again if inflation doesn’t show clear signs of slowing down:

American annual headline inflation

Although personal consumption expenditures (‘PCE’) is the Fed’s preferred measure for inflation, the rate of change in the non-core consumer price index (‘CPI’) usually moves similarly to PCE and can show shifts earlier. May’s inflation was 0.1% lower than the consensus, the first time this has happened for more than a year, but it appears that markets might have overreacted to the release.

A slightly lower rate of inflation in one month doesn’t necessarily mean anything for monetary policy or markets in the longer term because the Fed’s been clear that it expects a sustained decline in the rate of inflation to 2% before it starts cutting rates. As of now, it remains clear that inflation has stuck above 3%, which is still too far from the target.

The American economy seems to be cooling off somewhat on the whole, but this isn’t a clear or consistent picture yet. June’s NFP was significantly stronger than expected although inflation came in slightly lower in May. It’s probably still too early to call the number of cuts by the Fed before the end of the year or when or if the economy will complete a soft landing. With no critical data from the USA next week, the focus might shift to releases from other countries and action on charts.

Cable, Daily

undefined

Despite generally less inspiring data from the UK recently, the pound has continued its gains against the dollar although with lower momentum. The dominant news for the pound currently is the upcoming general election to be held on 4 July; currently the opposition Labour party is likely to win a landslide according to polling. Traders generally expect the Bank of England to cut its rate in August or September.

$1.29, the area of 8 March’s intraday high, is likely to be a strong resistance which probably won’t be broken unless there’s a significant surprise from next week’s British inflation or the Bank of England’s upcoming meeting. However, the uptrend still seems to be valid for now, with ATR not at a bottom and the slow stochastic close to neutral. The 20 SMA – currently around $1.275 – seems to be an important dynamic support for the short term. 10 June’s doji might suggest that a break below $1.27 is unlikely for now.

Dollar-yen, Daily

undefined

The divergence in monetary policy between the USA and Japan is still likely to remain for at least many months and possibly years. This week’s meeting of the Bank of Japan (‘the BoJ’) probably won’t result in any shift in rates, but attention is on whether the BoJ might reduce its purchases of bonds. For now, there’s no discussion of any further intervention to stabilise the yen, which has now lost more than half of its value against most other hard currencies since 2021.

The 61.8% weekly Fibonacci extension around ¥158 looks like a very strong resistance which will resist testing unless upcoming data or the BoJ’s meeting deliver a genuinely big surprise. The slow stochastic at around 78 is very close to overbought but not yet in the zone of buying saturation. Usually, second and subsequent tests of a certain area tend to be less likely to break through without a fundamental catalyst. That’s why it would traditionally be preferred for a trend-following trader to buy in lower in this situation.

The main dynamic support here is the 50 SMA from Bands slightly below ¥156. That probably doesn’t look too appealing for sellers except in the short term because it’ll be more difficult to find a good ratio of risk to reward for such a trade. The BoJ’s meeting in the early hours GMT of Friday 14 June is the key news coming up, but traders will also monitor American retail sales and Japanese balance of trade on Tuesday 18 June.

This article was submitted by Michael Stark, an analyst at Exness.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.

About the Author

Michael Starkcontributor

Michael is a financial content manager at Exness. He's been investing for around the last 15 years and trading CFDs for about the last nine. He favors consideration of both fundamental analysis and TA where possible.

Did you find this article useful?

Advertisement