US dollar bounces back as Fed revises rate forecast
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
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
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- 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.
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