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US dollar bounces back as Fed revises rate forecast

An action-packed day in financial markets saw a strong reaction to the May CPI report and a slow digestion of rhetoric from the June FOMC meeting. Learn what the Fed had to say and why markets may not believe them.
Source: Getty Images
Picture of Glen Frybarger
Glen Frybarger
Senior Content Strategist, Chicago

Key points

  • Lower-than-expected CPI caused early market reaction: (0:35)
  • FOMC held rates, signaled only one rate cut in 2024: (1:36)
  • Markets still pricing in two cuts this year: (3:34)
  • How does this rate adjustment affect USD?: (4:55)

Lower-than-expected CPI caused early market reaction

Data from the May CPI index reported an unexpected decline of 0.1%, triggering a significant drop in the US dollar and driving stocks to new all-time highs premarket and continuing throughout the morning. Notably, the AUD/USD currency pair rose as much as 1.4% as the US dollar gave up many of the gains it made earlier in the week. Even though headline inflation, at 3.3% YoY, is still far from the Fed's 2% goal, markets interpreted this soft data as a strong signal that the fight against inflation is near its end and rate cuts could be coming.

FOMC held rates, signaled only one rate cut in 2024

The Federal Reserve maintained interest rates for the seventh consecutive meeting and adjusted its forecast, now expecting just one rate cut in 2024, a shift from the three cuts projected in March. This revision suggests a more cautious approach to monetary easing and a hawkish contrast to the soft inflation data reported earlier in the day. Fed Chair Powell acknowledged the reading was a positive sign, but could not commit to more aggressive cuts as a result—especially given the hot jobs data reported at the beginning of June.

Markets still pricing in two cuts this year

Despite the Fed's conservative projections, the futures markets are still betting on a more aggressive cut, with a more than 60% likelihood of exceeding 25 basis points in cuts this year. Those same projections are still predicting the first cut could come as early as the September FOMC meeting. This disparity between the Fed’s forecasts and market expectations highlights ongoing uncertainty and speculative positioning among traders.

How does this rate adjustment affect USD?

Following the Fed’s indication that rates might remain higher for longer, the US dollar has seen a slight recovery against major currencies. This change has notably pushed GBP/USD below the 1.2800 mark again, reflecting the broader market recalibrations in response to the updated interest rate expectations. Interestingly, the CPI release spurred greater market movements in USD and other assets than the FOMC proceedings, as markets—much like the Fed—favored the data over speculative forecasts.

How to trade US dollar

  1. Open an account to get started, or practice on a demo account
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  3. Open, monitor, and close positions on USD pairs

Trading forex requires an account with a forex provider like tastyfx. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like tastyfx’s YouTube channel. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.

Reviewed by:
Frank Kaberna
Director of Strategy, Chicago

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