Fed's Moment of Truth: Inflation Data to Decide Dollar's Fate

It is the moment of truth for the Dollar and equities as the US gets ready to release its inflation data. Over the past 2–3 weeks, the market has been unsure whether the Federal Reserve will increase the Fund Rate. As the inflation data edges closer, economists are starting to lean towards a “pause” this week. In contrast, previously, it was thought that up to 60% of economists thought the Fed would hike again.  Most economists now believe the Federal Reverse will pause but warn of further interest rate hikes. 

Nonetheless, a central bank decision will largely depend on tomorrow’s inflation data. If the inflation data exceeds the market’s expectations, the Federal Reserve may hike another 0.25% to pressure demand. However, if inflation declines as expected or more than expected, the Fed will likely hold rates unchanged. The inflation data and interest rate decisions will influence the market’s pricing of the US Dollar, Gold, and US Equities. 

Analysts expect the US inflation rate to decline from 4.9% to 4.1% and the Monthly Consumer Price Index to read 0.2%. This would result in the lowest inflation rate since April 2022 and relatively close to the Fed’s 2% target. However, the Federal Reserve is likely to mention that the decline is only half the job; the next goal would be to keep inflation at 2% for a prolonged period. The Federal Reserve will likely tempt investors away from the possibility of an interest rate cut later in the year. 

EUR/USD - Inflation Data to Determine the Dollar’s Fate

The EUR/USD is currently trading at the weekly open price, with neither the Dollar nor the Euro gaining. However, this will likely change after EU and US investors enter the market. The Euro this morning is slightly gaining against the Pound and the Yen. At the same time, the US Dollar Index remains steady at the breakeven point. When monitoring daily timeframes, such as the 15-minute and 30-minute, traders can see lower impulse waves indicating a downward trend. However, investors should be cautious that the price movement is only a retracement on larger timeframes. Therefore, if the Dollar continues gaining, investors will look for the exchange rate to decline below 1.07470.

EUR/USD 30-Minute Chart on June 12th 

The exchange rate this week will not only be influenced by the data affecting the Fed’s rate decision and the decision itself. The European Central Bank’s rate decision on Thursday will also influence the exchange rate and various economic data from this week. Analysts expect the European Central Bank to increase interest rates from 3.75% to 4.00%. However, analysts believe the ECB is not likely to hike above 4.25%. 

The Federal Reserve, on the other hand, is now expected to keep interest rates at 5.25% after hiking consecutively since March 2022. Therefore, the Fed is expected not to follow other central banks from the past two weeks, for example, the RBA and BoC. However, this is only likely if inflation does indeed considerably decline. Inflation expectations have been weakened after European inflation data declined and China data over the past 24 hours also sharply dropped.  

Investors will also closely monitor the German ZEW Economic Sentiment tomorrow midday and Wednesday US Producer Price Index. Nonetheless, as mentioned above, the Consumer Price Index and the Fed’s decision will be the main price driver. After the rate decision, investors will focus on the Chairmen’s forward guidance and how likely interest rate hikes are in July. 

NASDAQ

The NASDAQ on Friday formed a full price correction and even managed to renew the asset’s yearly highs. The discount price and the higher possibility of a pause primarily drove the price. In addition to this, investors also believe that lower inflation can support company expenditure and consumer demand. This morning, the instrument is trading slightly higher, as most global indices are. 

However, traders should note that the Federal Open Market Committee outcome is uncertain, especially before the inflation data. There is still a possibility that the Federal Reserve will opt for a small hike, like other central banks. Specifically, if inflation does not decline as strongly as expected. Currently, investors are pricing in a “pause” with hawkish forward guidance. Therefore, a hike can trigger a change in pricing and investor sentiment. 

A pause alongside lower inflation data can support the stock market in the medium term. The NASDAQ has been consecutively increasing in value for eight weeks and forming a bullish trend. Further bullish momentum can fuel more bullish indications from technical analysis and provide traders with further opportunities. However, traders should also be cautious of the investor sentiment, which is likely to become more careful as the price continues to renew its highs. Over the past two weeks, the asset has collapsed after restoring highs.  

When monitoring technical analysis, traders can see that the price has returned to the trend zone of the regression channel. Additionally, moving averages have crossed upwards, and the price is trading above the Ichimoku Trading clouds. All indications are currently pointing towards an upward trend. The only bearish indications are seen on the Relative Strength Index, which has formed divergence on larger timeframes. However, a further bearish signal may arise if the price collapses below $14,438 and $14,232.

NASDAQ 1-Hour Chart on June 12th 

Summary:

• Investors turn their attention to tomorrow’s US inflation data. Analysts expect inflation to decline rapidly this month, which could tempt the central bank to pause hikes. 
• Analysts expect the US inflation rate to decline from 4.9% to 4.1% and the Monthly Consumer Price Index to read 0.2%. 
• The Euro this morning is slightly gaining against the Dollar, Pound, and Yen. Markets expect the European Central Bank to hike interest rates by 0.25%.
• The NASDAQ again renewed its 2023 price highs, but the instrument’s pricing will largely depend on inflation and the Fed’s rate decision.