“To trigger a bigger reversal of the recent USD weakening trend, the US CPI report for May and/or FOMC meeting would have to seriously cast doubt on whether the Fed will cut rates at all this year,” MUFG said in a Friday note.
Ahead of the Fed’s two-day meeting next week, bets on hawkish pause from the Fed were given a boost after “today’s strong US NFP report both for employment growth and wages,” MUFG added.
Friday’s report arrived against a backdrop of labor market updates this week, including data showing job openings plunge to a three-year low.
The odds of September rate fell to 45% on Friday from 55% a day earlier, according to Investing.com’s Fed Rate Monitor Tool.
Earlier this year, the Fed signaled three cuts for this year, but stubborn inflation and a strong jobs market suggest the economy doesn’t need any help from multiple rate cuts.
“We expect the Fed’s updated projections to show an upward revision to the inflation outlook for this year but not sufficient to prevent the Fed from continuing to signal that they plan to deliver multiple rate cuts in the 2H of this year,” MUFG said.
The upcoming CPI inflation data for May due Wednesday, may also play a role in the Fed’s thinking and the dollar’s next move, Morgan Stanley said.
“We expect USD to decline if May CPI surprises to the downside, leading the committee to leave its March projections for core PCE and the fed funds rate unchanged in the June SEP,” Morgan Stanley said.
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