US Dollar: Data-dependent Fed stance and volatile pricing – BNY

BNY Markets’ John Velis and David Tam note that June Consumer Price Index (CPI) is expected to show softer headline inflation on lower energy, but recent events have lifted Oil prices again, complicating short-term forecasts. They argue inflation outcomes remain highly uncertain, with Waller’s hawkish remarks underscoring that persistent price pressures could force further Fed tightening and keep markets and US Dollar rate expectations choppy.

CPI, energy swings and Fed reaction

"Later on Tuesday, the June CPI report will be released, and with the sharp decline in energy prices, markets are expecting a retreat in headline prices over the month."

"Waller delivered a hawkish message on Monday, warning that rates could rise if inflation doesn’t relent."

"This is obvious: if prices remain hot, the Fed will have to act."

"We maintain our view that the Fed will stay on the sidelines for the rest of the year, although developments on the inflation side are both key to our view and quite uncertain."

"The inflation data this week (including PPI later in the week) will help firm up views one way or another, but we warn the data will be volatile going forward, and very likely the markets along with them."