Inflation in the US came in slightly better than expected by analysts. The headline inflation slipped below the 5% psychological mark – to 4.9%. Core inflation eased to 5.5%, and the monthly headline figure jumped to 0.4% from 0.1% printed a month earlier, as expected.
The only surprise was the yearly headline figure that slipped to 4.9%.
Falling US inflation is feeding into higher demand in treasuries. The US 2-year yield slipped back below the 4% mark on expectations that the Federal Reserve’s (Fed) latest rate hike was certainly the last.
Fed rate cut expectations jumped again. The consensus is that the Fed’s latest rate hike was certainly its last for this cycle, and the Fed will cut the rates by 75bp before the year ends.
Is it reasonable? Yes and no.
No, because inflation is cooling but inflation is still more than twice compared to where the Fed wants it to be, and the downside potential from the actual levels is certainly lower, as most of the decline is due to the decent fall in energy prices, which have however mostly stabilized since a couple of months now. Therefore, if we consider the inflation fight alone, the Fed should continue hiking rates.
But we also know that the bank stress is tightening credit conditions and helping the Fed to do its job – restrict credit in a way to slow growth and ease inflation.
Today, the consensus is that the Fed’s latest rate hike was certainly its last for this cycle. And if that’s the case, looking at what happened over the past 40 years, five over the past six tightening cycles ended with the Fed immediately cutting the interest rates after a peak, except in 2018 where the rates remained at peak for 5 months before being pulled down again.
In this context, expecting a rate cut in the next few months is reasonable and the negative outlook for the USD makes sense, even more so when inflation numbers hint that the trend is in the right direction.
Though I can almost guarantee you that we won’t see US inflation back at 2% anytime this year, and any time before the Fed re-starts cutting rates. This is why, the price rallies in the USD remain interesting opportunities for topsellers for a further slide toward fresh ytd lows.
BoE will hardly close the door for further rate hikes
The Bank of England (BoE) is expected to raise its interest rate by 25bp when it meets today, but it will certainly leave the door open for further hikes.
Mr. Bailey and Mr. Sunak think and communicate that inflation in Britain will fall sharply in the second half of this year. But for now, nothing, in terms of hard data, points in that direction. Released yesterday, a report from Reed showed that average wages in the UK grew 10%, matching the rise in cost of living. While that’s good news for workers, a 10% rise in salaries means that inflation will likely be stickier and harder to combat and require further rate hikes.
On the currency front, the divergence between the Fed – which is getting concrete results on its inflation fight, and the BoE – which still deals with double-digit inflation, should support the medium term bullish outlook for Cable. The pair is about to break above a long-term down-trending channel top, if successful, we could see traders set their eyes back on the 1.30 mark.
 is expected to raise its interest rate by 25bp when it meets today, but it will certainly leave the door open for further hikes.){kind=link}