The DXY Index depreciated a third day by 0.6%, breaking below the 50-day moving average (104.75) to a five-week low of 104.35 or its 200-day MA. US CPI inflation provided relief that the Fed’s last mile towards its 2% inflation target may become less complicated. Core inflation cooled to 0.3% MoM in April after holding at 0.4% for three months. Advance retail sales were unchanged in April vs. the consensus for a 0.4% MoM increase; March was revised to 0.6% from 0.7%. The above data were consistent with Fed Chair Jerome Powell’s recent comment that inflation would decline again on a monthly basis, and that monetary policy was restrictive and working to weigh on consumer spending. Last Thursday’s unexpected surge in initial jobless claims also aligned with Powell’s view that demand for workers was cooling and a recent New York Fed survey that consumers had depleted their surplus pandemic savings. However, based on historical trends this year, today’s initial jobless claims will unlikely follow through with another rise.
The DXY is approaching its psychological support level at 104, near a trendline and its 100-day MA. Another support lies at 103.70 or its 300-day MA. While the inflation print supported the Fed’s case not to resume rate hikes, the “cooler” 0.3% MoM increase inflation aligned with the New York Fed’s recent increase in 1Y inflation expectations to 3.26% in April from 3% in March. Fed President Austan Goolsbee (Chicago) welcomed the slowdown in price growth but maintained that more progress was needed before he supported rate cuts. His colleague, Neel Kashkari (Minneapolis), agreed that rates should stay on hold a while longer. Overall, the Fed needs inflation to keep cooling on a monthly basis to gain sufficient confidence for inflation to return to the 2% inflation target. Until then, we see the Fed reducing, at the June FOMC meeting, the three rate cuts it projected in March. We forecast the Fed delivering two rate cuts in the second half of this year.
Quote of the day
“Success is a collection of problems solved.”
I.M. Pei
16 May in history
Chinese American architect I. M. Pei is awarded the Pritzker Architecture Prize in New York in 1983.
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