FOMC and BOJ meet this week
The Fed should reduce the three cuts it projected for this year but look for inflation to fall in 2H24.
Group Research - Econs, Philip Wee10 Jun 2024
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Last Friday’s 0.8% rebound in the DXY Index to 104.89 from the higher-than-expected US nonfarm payrolls may be unsustainable. The US Federal Reserve will likely be more concerned about the US unemployment rate rising to 4% in May, which was the highest since January 2022 and at the level it projected for 4Q24. Additionally, the Fed will be less confident about the US economy achieving 2.1% growth in 4Q24. Real GDP growth slowed significantly to an annualized 1.3% QoQ in 1Q24 after cooling to 3.4% in 4Q23 from 4.9% in 3Q23.

Despite the sticky US inflation this year, the US central bank will keep the Fed Funds Rate unchanged at 5.25-5.50% for the seventh FOMC meeting on June 11-12. The Fed will likely reduce the three interest rate cuts projected for this year, but Fed Chair Jerome Powell will set a high hurdle for a hike.

Powell will likely consider monetary policy sufficiently restrictive to lower inflation in 2H24, especially in month-on-month terms. Hence, the US CPI data on June 12 will be important. We see headline inflation slowing a second month to 0.1% MoM in May from 0.3% in April. Although the Fed’s favourite gauge, the core PCE inflation, held around 2.8% YoY in February-April, it did not deviate far from its 2.6% projection for 4Q24.

Powell will likely warn that the US federal debt was on an unsustainable path. Over the weekend, the International Monetary Fund (IMF) urged the US to start consolidating its fiscal position. In March, the US Congressional Budget Office (CBO) warned that the federal debt held by the public would keep increasing to 116% of GDP in 2034 after rising to 99% of GDP in 2024 from 97% in 2023. America’s fiscal finances have potential to become an issue at the US Presidential election less than five months away, one that could revive talks of de-dollarisation. Hence, pay attention to the discussion between New Fed President John Williams and Treasury Secretary Janet Yellen at the Plaza Hotel on June 13.

The Bank of Japan meeting will discuss scaling back its JGB purchases at its June 14 meeting. Despite easing by 9.4 bps to 0.976%, the 10Y JGB yield remained well above the 0.61% level at the end of 2023. The BOJ will likely warn about a second rate hike this year due to persistent JPY weakness, which is raising import costs and inflation expectations amid sustained wage gains. The OIS market reckoned that the BOJ could lift rates in July or October. Assuming no hawkish surprises at the FOMC meeting, USD/JPY’s rebound from the 154.50 low on June 4 could stall at the 157.70 high seen on May 29.

USD/CHF should resume its decline if the Fed does not sound hawkish at its FOMC meeting. We do not see the Swiss National Bank delivering a back-to-back rate cut at its meeting on June 20. SNB President Thomas Jordan attributed the recent rebound in inflation to the CHF’s weakness. He also noted that R star had probably increased from the estimated 0%. Switzerland’s harmonized CPI inflation rose a second month from 1.4% YoY in April to 1.5% in May, the same level as the policy rate. 

Quote of the day
“Either write something worth reading or do something worth writing.”
     Benjamin Franklin

10 June in history
Benjamin Franklin tested the lightning conductor with his kite-flying experiment in 1752.


Philip Wee

Senior FX Strategist - G3 & Asia
[email protected]


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