CPI makes its way to the Fed’s transitory mix

Posted by Matt Simpson | 24/05/2017 22:36

Despite starting the session on a firmer foot, the US Dollar traded lower following the FOMC minutes and expectations for further hikes followed suit.

The US Dollar faced further pressure overnight, particularly against commodity currencies as the Fed pinned a data rebound to the likelihood of the hike path. Adding CPI and consumer spending to their mix of ‘transitory’ weakness, these along with GDP need to pull their socks up for markets to have any confidence of the Fed’s implied trajectory.

The recent weakness of growth and consumer prices are both seen as transitory, therefor expected to rebound over the coming months. Yet traders also took note of the lower staff forecast for inflation in 2017 and the ‘several members’ which saw downside risks to the Fed’s inflation outlook. With no further clues over balance sheet adjustments, the minutes were seen to be more dovish than hoped. We still see a June or July hike as probable, yet data needs to improve to revive hopes of a 3rd hike this year.

According to the CME FedWatch tool, expectations for a June hike remain in favour over July yet the probability for both fell following the minutes; June now at 78.5% (83.1% prior) and July at 74.2% (79.8% prior). Interestingly, whilst expectations were lower for most readings of a 2nd hike, the probability for December increased to 46.8% (45.9%) to show some traders remain in tune with the Fed’s festive hiking pattern of this cycle.

USDCAD benefited from the slightly dovish minutes and stronger oil prices surrounding the OPEC meeting, breaking to a 4-week low and enduing it’s most bearish close since 3rd March. Hovering just above the 1.34 handle in early Asia, momentum favours a break of this level for a run towards 1.335 support.

USDJPY rolled over from the 5-day high to print a near-term reversal pattern. The gains from 110.20 suggest the rally is merely corrective and we may have already seen the corrective high at 112.12. We just need to see continued soft data from US and a few more curveballs form the Whitehouse and USDJPY could find its way back towards and even beyond the 110.20 lows printed last week.
Summary of the Fed’s May Minutes 

  • (GDP) slowed in the first quarter, with the slowing likely reflecting transitory factors
  • GDP growth was projected to bounce back in the second quarter from its weak first-quarter reading
  • The staff continued to project that real GDP would expand at a modestly faster pace than potential output in 2017 through 2019


  • MoM declines of both PCE and CPI appeared unlikely to be repeated
  • Their softness reflected transitory soft consumer expenditures and inventory investment
  • Several others continued to see downside risks to the inflation outlook
  • A few considered consumer price weaknesses too early to judge the implications for the outlook
  • PCE growth was expected to pick up to a stronger pace in the spring
  • The staff’s forecast for consumer price inflation, as measured by changes in the PCE price index, was revised down marginally for 2017
  • Inflation was still expected to be somewhat higher this year than last year


  • Employment increase for the Q1 was solid
  • Unemployment rate was projected to decline gradually over the next couple of years
  • At 4.5 percent, the unemployment rate had reached or fallen below levels that participants judged likely to be normal over the longer run

Consumer Spending

  • Recent readings on key factors that influence consumer spending pointed to solid growth in real PCE in coming quarters
  • This includes gains in employment, real disposable personal income and households’ net worth
  • Participants expected to see a rebound in consumer spending in coming months
  • Much of the recent slowing likely reflected transitory factors


  • couple of participants indicated that increasing the target range for the federal funds rate at the current meeting would be warranted by their economic outlook
  • Most participants judged that if economic information came in about in line with their expectations, it would soon be appropriate for the Committee to take another step in removing some policy accommodation
  • Members continued to judge that there was significant uncertainty about the effects of possible changes in fiscal and other government policies but that near-term risks to the economic outlook appeared roughly balanced

Matt Simpson | Senior Market Analyst

A certified technical analyst, combining macro themes, monetary policy and business cycles to generate Forex and commodity trade ideas.

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