[Key takeaways]
● At its May meeting, the Federal Reserve kept its target range for the federal funds rate at 5.25%-5.50%, marking the sixth consecutive time it remained unchanged.
● The probability of a Fed rate cut in September has increased significantly from 50% to 70% in the first week of June due to indicators of a cooling labor market and downward revisions in labor costs.
● The US Dollar Index (DXY) is in a downtrend and is currently testing the 104.00 level, with the potential to fall further if dovish statements from Fed officials materialize.
On June 11 and 12, the US Federal Reserve’s Federal Open Market Committee (FOMC) will meet to decide on key interest rates in the US economy and release the FOMC’s latest economic projections. The expectation is that the Fed will leave interest rates unchanged.
At its May meeting, the Federal Reserve kept its target range for the federal funds rate unchanged at 5.25%-5.50% for the sixth consecutive time. This decision was driven by persistent inflationary pressures and a tight labor market, indicating that progress towards achieving the 2% inflation target this year is stalling.
The number of vacancies fell by 296,000 from the previous month to 8.059 million in April 2024, the lowest level since February 2021 and below the market consensus of 8.34 million. Additionally, US private companies added 152,000 workers to their payrolls in May 2024, the lowest in four months and significantly lower than the forecast of 175,000 and the downwardly revised 188,000 in April. Initial jobless claims also rose more than expected last week, and labor costs were revised downward in the first quarter. Given these indicators of a cooling labor market and downward revisions to labor costs, the likelihood of a Fed rate cut this fall has increased significantly. During the first week of June, the odds of a September rate cut rose from 50% to 70% as investors anticipated a more dovish stance from the Federal Reserve in response to softer economic data. However, the US non-farm payroll (NFP) report released on Friday was stronger than expected, with the chances of a rate cut falling to 56% (according to CME’s FedWatch tool).
‘The US labor market is still strong, but is showing signs of cooling, as are economic indicators and the pace of inflation. While the market widely expects the Fed to keep interest rates unchanged, there is a good chance that Fed officials will hear dovish statements, which could put pressure on the U.S. dollar,” said Kar Yong Ang, a financial market analyst at Octa.
The US Dollar Index (DXY) has been in a downtrend since April 16. The key level is 104.00; a break from this level could send the price down to 103.80 and 103.50.
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