The imbalance between the US economy and Federal Reserve policy grew further today, as producer prices climbed for the sixth straight month in May, adding to inflationary worries, which the Fed continues to dismiss as being temporary. The stock markets are still leaning on the Fed’s side of the argument with US futures hardly moving in reaction to the PPI data, a day after the S&P 500 hit yet another new record high. The US dollar, on the other hand, has shown some strength here and there, but this could be because of short-covering ahead of the eagerly-awaited Federal Reserve meeting. So, all eyes and ears are slowly turning to the FOMC decision on Wednesday and ahead of it expect to see some choppy price action in an overall risk-on market environment.
FOMC in focus
Will the Fed surprise the market with a hawkish statement or dot plots? I am doubtful even if I don’t necessarily agree with their stance.
Many market observers reckon Fed Chair Jay Powell may wait until the Jackson Hole summit in August to signal a reduction in bond purchases. Any hints of taper on Wednesday would therefore come as a surprise, which could see the markets turn volatile. However, if it is status quo then we should see the dollar come under renewed pressure.
But with inflation running at 5%, unemployment rate at 5.8% and GDP projected at 6.4%, the Fed will have to convince some sceptics that they know what they are doing.
US Retail Sales drop but PPI rises
Ahead of the FOMC day, we have had some mixed-bag data today:
- Headlines retail sales fall more than double expectations at 1.3% on the month, in a further sign that Americans have cut back on spending as stimulus support fades. You may recall that in March, sales had jumped more than 11% when the arrival of new stimulus cheques saw consumers splash the cash. Consumer spending needs to stay strong to convince the Fed the recovery is on a sustainable path.
- This comes as an index of producer prices that US businesses receive for their products and services (PPI) rose 0.8%, more than 0.5% expected. Core PPI also topped expectations with a print of 0.7% m/m.
- Meanwhile, industrial production rose 0.8% m/m vs, +0.7% expected.
All eyes are turning to the FOMC decision on Wednesday and ahead of it expect to see some choppy price action in an overall risk-on market environment. Keep a close eye on THIS bear flag pattern on the Dollar Index Daily chart:
Source: ThinkMarkets and TradingView.com
If the DXY breaks below the channel then expect to see a new low for the year below 89.20.
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