The last Fed meeting played out as anticipated. With June’s CPI data coming in lower than expected the Fed is feeling it could start to see a genuine pathway back to 2% inflation. With the headline coming in at 3% and the core at 4.8% (which, although high, was below the market’s minimum expectations), inflation is tracking lower. Look at the headline and you can clearly see the stepping fashion lower.

This has given the Fed confidence to not signal a definite rate hike for September. Powell said that it is possible the Fed could hike in September, but only if the data warrants it. In June’s dot plot, Powell was very specific in citing the possibility of two more rate hikes. However, with the Fed hiking by 25 bps another rate hike was not clearly signaled by Jerome Powell. This led to a snap reaction lower in the USD as markets now expect a more ‘data dependent’ Fed.

What does this mean going forward?

Well, it means that incoming inflation data is the single most important data point for the Fed. As long as inflation is heading lower then markets will feel much more confident that the Fed has reached peak terminal rate. The basic expectation for intraday trading going forward will be this:

  • Lower-than-expected inflation prints, then typically expect: Lower USD, lower US10Y yields, higher US stocks, higher gold.
  • Higher-than-expected inflation prints, then typically expect: Higher USD, higher US10Y yields, lower US stocks, lower gold.

Key upcoming inflation data to be aware of is on August 10th at 13:30 UK time (US CPI), US Core PCE on August 31 at 13:30 UK, and University of Michigan 1 & 5-year inflation expectations at 15:00 UK time.

However, if strong data comes in for the US economy, then watch out for a potentially stronger USD, weaker stocks, and a headwind for gold. Why? This is because Powell has said that stronger-than-expected growth may prove to be inflationary, so watch out for expectations for higher US rates to appear on any very strong US growth data. Inflation data is not the only show at the moment. Read the Fed’s full statement here.