- The dollar rebounded from its two-week lows on Friday.
- The Federal Reserve will likely keep rates unchanged this week.
- Markets predict that headline inflation increased at an annual rate of 4.1% in May.
Currency futures fell as investors awaited inflation data and the Federal Reserve’s interest rate decision. At the same time, the dollar rebounded from its two-week lows on Friday.
The Federal Reserve will likely keep rates unchanged at its June 13-14 meeting. Still, it will likely maintain a hawkish stance and suggest a possible rate hike in July due to inflation exceeding the 2% target.
Vassili Serebriakov, an FX strategist at UBS in New York, stated that the Federal Reserve believes they still need to take further action and will discourage expectations of policy easing.
Markets expect the upcoming data to reveal that headline inflation increased at an annual rate of 4.1% in May, while core prices saw a gain of 5.3%. Moreover, underlying monthly inflation is expected to remain elevated.
Meanwhile, investors are keeping tabs on the greenback, which is currently experiencing limited movement. They await clearer indications of whether the economy will maintain its strength and elevated inflation or is heading towards a contraction.
Recent data from Thursday indicated that the number of US citizens filing new claims for jobless benefits skyrocketed to the highest level in over 1-1/2 years during the previous week. Additionally, the jobs data from May, released last Friday, showed that employers added 339,000 jobs, surpassing expectations. However, the unemployment rate rose to a seven-month high of 3.7%.
“The market has interpreted this surge in jobless claims as a clear indication of forthcoming weakness in the US economy and a Federal Reserve that is more hesitant to raise rates,” explained David Stritch, a strategist at CaxtonFX.
This week, the ECB and the Bank of Japan (BOJ) are scheduled to hold meetings. The ECB is expected to raise Eurozone rates by 25bps, while the BOJ will likely maintain rates at their current level.
Elsewhere, the Canadian dollar remained stable against the US dollar, near its two-month high, as investors continued to anticipate another rate hike by the Bank of Canada. This was despite unexpected job losses in domestic data.
Shaun Osborne, chief currency strategist at Scotiabank, noted that the Canadian dollar’s recent gains were primarily driven by the Bank of Canada’s decision to tighten rates.