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As Fed Chairman Jerome Powell said yesterday as part of a speech at the ECB Central Banks Forum, the US economy can withstand the current and upcoming changes in monetary policy (meaning towards its tightening), and the strengthening of the dollar, in his opinion, is "disinflationary". Powell also said the Fed's biggest risk right now is "failure to restore price stability."
Powell reiterated the Fed's commitment to fighting high inflation, as other members of the US central bank's leadership have also spoken about earlier.
For example, New York Fed President Williams said on Tuesday that "it's prudent to go to 3.5% - 4% of the federal funds rate" this year, and then to 3.50% -4.00% next year. According to him, “a change in the rate by 75 b.p. right,” and the Fed’s July meeting will discuss a 50bp or 75bp hike.
"Monetary policy will need to act more decisively to get inflation back on target," Cleveland Fed chief Loretta Mester said yesterday.
Thus, economists expect that “US short-term rates will peak at the end of the year at 3.50% and fall by 25 bp. by next summer,” and it’s too early to bet on a dollar decline and a reversal of its bullish trend.
Today (at 12:30 GMT) a whole block of important macro statistics for the US is expected to be published, including inflation data (personal consumption expenditures - PCE base price index) for May and a weekly report from the US Department of Labor with data on the number of applications for benefits for unemployment.
The PCE Annual Core Price Index (excluding volatile food and energy prices) is the primary measure of inflation that Fed FOMC officials use as a primary measure of inflation. Forecast for May: +4.7% (annualized) after growth of +4.9%, +5.2%, +5.3%, +5.2% in the previous months of 2022. Despite the relative decline, this is still a high PCE value, and a higher-than-expected value could push the US dollar higher.
It is also expected that the number of initial and repeated claims for unemployment benefits will remain at the lows corresponding to the lows of the period before the coronavirus pandemic, which is also a positive factor for the dollar, indicating the stability of the US labor market.
Today, on the last day of the month, quarter and half year, the dollar maintains a positive trend, while its DXY index remains close to 105.00. At the time of writing this article, DXY futures are traded near 104.81. Breakdown of the recent local high of 105.56 will be a signal to increase long positions in DXY futures with the prospect of growth towards multi-year highs of 121.29 and 129.05, reached, respectively, in June 2001 and November 1985.
