Forex Today: Hawkish FOMC Questions Inflation Progress, Commodities Tumble - 23 May 2024

The release of the US FOMC meeting minutes yesterday produced a hawkish surprise, with the participants showing serious concerns over persistent inflation and the prospect of rate cuts, leading to a selloff of commodities and boosting the US Dollar.

  1. The US Federal Reserve released the minutes of its most recent policy meeting, which revealed two hawkish factors:
    • Members are broadly worried that despite seeming progress on inflation over recent months, it is proving stubbornly persistent.
    • Members discussed that they may need to hold rates at their currently relatively elevated levels for longer than expected.

However, it is worth noting that according to the CME FedWatch tool, there remains a consensus that the Fed will make its first rate cut at its forthcoming September meeting.

  1. Markets reacted quite strongly to the FOMC minutes release. The most dramatic drops were in metals, with the price of Copper falling by several percentage points in just a few hours, killing the long trend trade there. The precious metals Gold and Silver fell quite strongly. Major equity indices fared much better, as after initial small knocks, the the NASDAQ 100 Index and the S&P 500 Index have risen to new all-time highs, although the the Dow Jones 30 Index is falling. Trend traders and day traders should be interested in getting long of the two major stock indices at all-time highs.
  2. In the Forex market, since the Tokyo open, the strongest major currency is the New Zealand Dollar, while the Japanese Yen is the weakest. The US Dollar is doing little right now, but it rose yesterday and can be expected to get a tailwind from yesterday’s FOMC meeting minutes.
  3. Yesterday’s release of UK CPI data came in slightly higher than expected, with annualized inflation falling from 3.2% to 2.3%. A fall to 2.1% was expected. Core CPI also fell by less than expected. This will reduce the chances of the Bank of England cutting rates at either of its next two policy meetings, which is a disappointment for Prime Minister Sunak who yesterday called a general election for 4 July. The opposition Labour Party is expected to win by a landslide and return to power for the first time in 14 years.
  4. There will be releases today of Flash Manufacturing and Services PMI data for the USA, Germany, the UK, and France.

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