The U.S. Dollar Index (DXY) surged 0.64% this week as the Street dialed down its rate cut expectations following a bearish inflation print. The index could continue to post gains as next week’s Fed meeting approaches.
Although the euro area annual inflation rate has fallen, the ECB once again kept its policy unchanged last week. Nonetheless, Yannis Stournaras, the Head of Greece’s central bank, has advocated for a series of rate cuts by the ECB this year, as reported by Bloomberg. Stournaras’s call for rate cuts reflects the sluggish economic growth in the European region.
U.S. Rate Expectations
In the U.S., Treasury Chief Janet Yellen does not expect rates to drop to pre-pandemic levels due to current market conditions. The latest projections from The White House anticipate that rates will remain significantly higher over the next three years compared to previous estimates.
Consequently, the Fed is widely expected to maintain rates at its upcoming meeting next week. Traders are now looking towards a potential rate cut in July, as opposed to the previously anticipated move in June. While consumers are grappling with shrinking wallet sizes, recent unemployment and producer price index data have provided the U.S. Fed with additional flexibility before considering any rate cuts.
Conversely, Japan opting for a rate hike this month appears to be increasingly likely. The announcement of wage deals from Rengo, Japan’s largest union group, exceeding expectations, has strengthened the possibility of a rate hike in the country. Should a rate hike materialize, it would mark the first such increase in nearly 17 years.
Meanwhile, the U.S. narrative is slowly shifting towards the potential of stagflation. The DXY seems poised to retest the 103.8 mark as the Federal Reserve meeting approaches.
Source: TradingView
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