Fed Needs Greater Confidence to Cut Rates. Forecast as of 11.07.2024

July 11, 2024 8:43 am

One report on US consumer prices for June may be enough for the Fed to start mulling over lowering the federal funds rate in September. Let’s discuss this topic and make a trading plan for EURUSD.

The article covers the following subjects:

Highlights and key points

  • The Fed needs a slowdown in CPI to be confident in a rate cut.
  • The Fed’s outlook has changed.
  • Inflation data may accelerate the EURUSD rally.
  • The slowdown in US CPI may propel the opening of more long trades on the EURUSD.

Daily US dollar fundamental forecast

After the FOMC meeting in December, the Fed beamed with confidence that it would start cutting rates in mid-2024. In March, in testimony before Congress, Jerome Powell noted that the central bank was close to certainty about the need to begin monetary expansion. However, accelerating inflation in the first quarter forced a change of plans. The Fed chairman said in June that the Fed needed more data to gain confidence. Therefore, the EURUSD’s reaction was far from modest.

Most investors may have thought that Jerome Powell said nothing new, but the shift in the Fed’s outlook is evident for those who follow markets closely and dig deep. Powell’s statement that the labor market is no longer a source of inflationary pressure and that its further cooling is undesirable clearly signals that the federal funds rate is about to be cut. This is unlikely to happen in July, as the Fed needs more data. The June US inflation report can strengthen investors’ confidence in September.

US consumer price index

Source: Bloomberg.

Consumer prices are expected to rise by a modest 0.1% and core inflation by 0.2% m/m, allowing the Fed to set the stage for the start of monetary expansion in the early fall. According to Jerome Powell, this will have nothing to do with policy. The central bank is considering many factors, but not the November elections. It faces a difficult task: when inflation slows and the economy cools, there is a critical moment, and the Fed needs to get it right.

If the labor market is no longer a source of inflationary pressure for the Fed, can the same be said for the ECB? According to Indeed, the wages for jobs offered in the euro area accelerated to 4.2% in June, the fastest pace since the beginning of the year. Against a backdrop of record low unemployment of 6.4%, this reinforces the risks of accelerating consumer prices and could force the European Central Bank to postpone plans to cut the deposit rate.

Eurozone annual average wage

Source: Financial Times.

The derivatives market expects a second step on the monetary expansion road in September. Still, if Christine Lagarde and her colleagues do not make it, it will support the EURUSD pair. In comparison, the US unemployment rate increased for the third consecutive month, and average wage growth fell to 3.9% in June, the lowest level since 2021. The divergence in labor market conditions is evident, and with it may come a divergence in monetary policy.

Daily EURUSD trading plan

However, the markets are focused on the release of US inflation data for June. If the data confirms a shift in the Fed’s outlook, EURUSD bulls will be off the leash. The slowdown in CPI is a strong argument in favor of opening more long trades, adding them to the ones formed in the area of 1.071-1.072.

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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