As traders brace for the dual impact of the upcoming US inflation report and the Federal Reserve’s decision, market anxiety is palpable. The index of dollar strength has extended its rally for the fifth consecutive session, nearing its annual peak. Treasuries steadied following a robust $39 billion auction, fueled by speculation that Wednesday’s inflation data could bolster the case for a rate cut this year.
The Fed must be convinced that inflation is decisively moving towards its target before initiating rate cuts. Saracen Markets believes that more substantial evidence of disinflation is required for the Fed to implement a rate cut this year. Market sentiment is cautious ahead of the crucial US CPI and FOMC announcements today.
The Federal Reserve is widely expected to maintain borrowing costs at a two-decade high on Wednesday, but uncertainty looms over officials’ quarterly rate projections, known as the “dot plot.” This projection could be a significant market mover, especially if it indicates only one rate cut in 2024 instead of the two cuts the consensus anticipates. Saracen Markets analyst forecasts that the new dot plot will suggest two 25-basis-point cuts this year, down from three in March. The May CPI is expected to provide the Fed with further assurance that inflation is easing.
In the commodities market, oil extended its gains following industry data indicating declining US crude stockpiles, ahead of the IEA’s market outlook report. Meanwhile, the Biden administration is reportedly considering additional restrictions on China’s access to AI-related chip technology.