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Dollar Weakens as Inflation Hits Lowest: Fed to Pause Interest Rate Hikes?

Interest Rate

BNR – The dollar sank on Tuesday after data indicated the smallest annual rise in inflation in over two years. This heightened the likelihood that the Federal Reserve would declare a pause in raising the interest rate at the conclusion of its two-day meeting on Wednesday.

The dollar index dropped 0.4% to 103.15, while the euro increased 0.5% to $1.0810. The dollar dropped 0.3% against the yen, trading at 139.16 yen. The consumer price index (CPI) increased 0.1% last month as fuel prices declined. This came after a 0.4% increase in April.

The CPI increased by 4.0% in the year to May. This was the weakest YoY rise since March 2021. Also, it came on the heels of a 4.9% increase in April.

The “core CPI” rose 0.4% in May, marking the third month in a row that it has done so.

Interest Rate Unchanged

“The numbers are probably enough to see the Fed keep rates on hold this month, as they have suggested,” said Stuart Cole, chief macroeconomist at Equiti Capital in London.

However, he stated that this is offset by the fact that the core monthly rate stayed steady at 0.4%. This figure, according to Cole, is incompatible with a 2% inflation target (too high). It is further emphasised by the far more moderate decline in the annual core inflation rate.

He went on to say that the FOMC could easily use this data to support another 25-bp hike.

Futures traders linked to the Fed’s policy rate currently believe there is a 95% probability the US central bank will refrain from raising the interest rate for the 11th time in a row. They anticipate that the benchmark rate will remain at 5.00% to 5.25% on Wednesday.

Prior to the announcement, traders projected a 25% possibility of a rate hike in June. The rate futures market has also reduced its bets on the Fed raising the interest rate in July. This is usually widely anticipated in markets prior to the report.


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