USD flows: Dots and Powell Could Diverge

Friday larger than expected US non-farm payroll outcome helped the USD push upwards, but the market is reluctant to go too far with the approach of the U.S. CPI release and FOMC on June 12.  Though CPI could cause some reaction if a deviation is seen from the median +0.3% for monthly core CPI, the FOMC is the most important event.  With the FOMC statement and dots before the press conference, the USD could benefit if the dots show a median of only 1 cut in 2024 – it is a close call between 1 and 2, given the previous distribution of the Fed Funds dots in March.  However, we feel that Powell wants to avoid the market taking a higher for longer message too far and if 1 cut emerges in the FOMC projections, then Powell press conference will likely downplay the dots and leave open the door for rate cuts.  Forward looking data is showing the U.S. economy slowing and the Fed will want to see how this progresses. 

This could mean that EUR/USD is choppy, but does not find lasting direction from the FOMC and leaving the wait for more data.  ECB Lagarde and Lane speak on June 14, but will likely maintain the same message as the ECB press conference – at least one month of data is required to adjust market pricing on the ECB.