**USD Outlook: Risks Tilt to the Upside Ahead of Key Data and Fed Meeting**
*Originally reported by eFXnews, with additional insights and analysis compiled from Bloomberg, Reuters, and recent market commentary as of June 2024.*
The US dollar (USD) has shown renewed strength recently, fueled by a combination of strong economic data, persistent inflation figures, and hawkish rhetoric from members of the Federal Reserve. With high-impact events on the horizon, including the upcoming FOMC meeting and the release of Consumer Price Index (CPI) data, markets are closely watching for any signal on future policy direction.
**Current Market Dynamics Supporting the USD**
Analysts from JP Morgan (reported via eFXnews) argue the risks for the US dollar are currently tilted to the upside. A variety of global macro factors are fuelling the greenback’s strength:
– **Resilient US Economic Growth**: Despite tightening monetary conditions throughout the past year, US GDP has continued to beat expectations. This suggests underlying robustness in the American economy, which gives the Federal Reserve more room to maintain or even raise rates if necessary.
– **Sticky Inflation Indicators**: Recent data releases show that inflation remains elevated, especially in core categories. This persistence supports the case for a more cautious Fed, which implies a higher-for-longer interest rate policy.
– **Market Positioning**: Short positioning in USD by institutional investors provides a setup for short covering in response to any upside surprises in data or hawkish Fed comments, which could accelerate gains in the dollar.
**Upcoming Catalysts That Could Jolt USD**
The confluence of significant events over the coming week could provide clearer direction on the near-term path of the USD:
1. **May CPI Report (Scheduled for Tuesday)**:
– Headline inflation is expected to cool marginally, with consensus projecting a year-on-year rise of 3.4%.
– Core CPI, which strips out volatile food and energy prices, remains a focal point. A reading above the Fed’s comfort zone (generally considered to be around 2%) would strengthen the case for sustained higher rates.
– The Fed has explicitly expressed a data-dependent approach, and any upside inflation surprise could lead to repricing in rate expectations.
2. **FOMC Meeting (Wednesday)**:
– While the Fed is widely expected to hold rates steady in June, the Summary of Economic Projections (SEP), particularly the dot plot, will be pivotal.
– The prior dot plot from March showed projections for three rate cuts in 2024. Given sticky inflation and labor market resilience, the June update may hint at only one or two cuts, or potentially none at all.
– Chair Powell’s press conference will also be scrutinized for forward guidance language. Any talk of delaying cuts to 2025 or an openness to further hikes would be bullish for USD.
3. **Retail Sales Data (Later in the Week)**:
– Consumer spending, accounting for two-thirds of US GDP, remains strong. Elevated retail sales could affirm continued economic momentum.
– This would support a policy stance that prioritizes inflation stabilization over growth protection, prompting yield differentials favoring the dollar.
**Central Bank Divergence: A Favorable Landscape for the Dollar**
JP Morgan and other global investment banks have highlighted the contrast between the Federal Reserve’s approach and other major central banks, particularly the European Central Bank (ECB):
– **ECB Cut While Fed Remains on Hold**: The ECB proceeded with a 25 basis point rate cut in June, as inflation pressure in the Eurozone appears more manageable. However, the ECB was cautious, noting that further easing will be data-dependent.
– **Disinflation in Other Economies**: Countries like Canada, Australia, and the UK are seeing clearer signs of disinflation. This divergence in inflation trends could lead their central banks to cut earlier and more aggressively than the Fed, widening rate differentials.
– **USD as
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