Traders are bracing for a pivotal U.S. consumer inflation report, with the dollar falling against most major currencies ahead of the release. The upcoming data is expected to indicate easing price pressures, potentially increasing the likelihood of Federal Reserve interest rate cuts. The core Consumer Price Index (CPI), which excludes volatile food and energy costs and is considered a better gauge of underlying inflation, is projected to rise 0.2% in June for the second consecutive month. This would mark the smallest back-to-back gains since August, a pace deemed acceptable by Fed officials.
June’s CPI report is shaping up to be another positive development that should enhance the Federal Open Market Committee’s (FOMC) confidence in the inflation trajectory. This could pave the way for the Fed to initiate rate cuts as early as September. Current market pricing in swaps indicates two Fed cuts in 2024, with a strong probability of the first cut in September.
In his recent testimony to Congress, Federal Reserve Chair Jerome Powell reiterated that the Fed does not need inflation to fall below 2% before considering rate cuts, emphasizing that officials still have considerable work to do. The key takeaway from Powell’s remarks is that the Fed’s assessment of risk is evolving. If this shift is supported and sustained by incoming data, it could lead to a rate cut in September.
As the market awaits the inflation report, the outcome will be crucial in shaping expectations for the Fed’s policy path. The potential for rate cuts hinges on continued signs of moderating inflation, reinforcing the importance of the forthcoming CPI data.