The central event of the current week, and possibly the month, will take place on Wednesday: we will find out the results of the US Federal Reserve's June meeting. On the one hand, the proposed Fed decision is predictable. The central bank will raise the interest rate by another 50 basis points, reaching a 1.5% intermediate result. On the other hand, the central bank may significantly tighten its already hawkish rhetoric after Friday's inflation report. Therefore, the June meeting will not be a passing one: traders will be focused on the main theses of the accompanying statement, as well as to the words of Fed Chairman Jerome Powell, who will hold a traditional press conference.
As you know, ten days before the meeting, Fed representatives are required to observe the "silence regime" - they cannot voice their position in public, assessing the current situation. Therefore, none of the members of the Fed commented on the latest data on the growth of US inflation. This circumstance strengthens the intrigue regarding the results of the June meeting. Indeed, contrary to the expectations of Powell, as well as many of his colleagues, inflation in May did not maintain its deceleration trend, but, on the contrary, set a new long-term record. To the dismay of Powell, the White House, and millions of Americans, prices are rising in almost every area—airfare, clothing, medical care, among others. Food prices went up significantly, by 10.1% at once (this is the strongest growth rate since March 1981). However, the main driving force behind the growth of the consumer price index was energy, which immediately rose in price by 34% year on year.
Let me remind you that following the results of the Fed's May meeting, Powell actually "tied" the rate of interest rate hike to the dynamics of inflationary growth. He assumed that US inflation would "level off" in the second half of the year, so it was difficult for him to talk about the pace of tightening monetary policy. As an argument, Powell pointed to the core PCE index, which really slowed down its growth, interrupting the multi-month upward trend. Literally immediately after the May meeting, the April report on the growth of the consumer price index was also published, according to which the CPI growth rate also slowed down, as if confirming the assumptions of the head of the Fed.
But the May inflation figures mixed all the cards. The rate of inflation accelerated again in the previous month, destroying the aforementioned "structure" of Powell. And since the report was published just a few days before the meeting, it is quite difficult to predict the reaction of the Fed members. We can only say with certainty that the central bank will raise the rate tomorrow by at least 50 basis points. Members of the Committee are unlikely to decide on a 75-point increase, although it is likely that such a step will be discussed, which we will learn about either from Powell's words at a press conference, or two weeks after the release of the minutes of the June meeting. It is noteworthy that analysts at Goldman Sachs and JP Morgan have already revised their forecasts, saying that there is a high probability of a 75-point rate hike in June. But still, this variant of the development of the event is not the main one - it can be conditionally called "ultra-hawk".
The "baseline scenario" that has been discussed and talked about most often in the expert community involves a 50-point hike + an increase in hawkish rhetoric. That is, the central bank unequivocally makes it clear that it will increase the rate at such a pace at each meeting - at least until the end of the year. Also, the Fed may hypothetically allow the option of a 75-point increase (Powell was extremely skeptical about this idea earlier).
But there is another scenario. It can be conditionally called dovish and the least likely. As part of its implementation, the central bank raises the rate by 50 points, announces a similar step following the results of the July meeting, but does not give any forecasts regarding further hikes. Powell may say that in the fall the Fed will evaluate the effectiveness of the measures already taken, after which it will draw appropriate conclusions. In principle, such a scenario was already discussed by the members of the Committee at the previous meeting, which we learned about from the minutes of the May meeting. But, I repeat, under the current conditions, the members of the US central bank are unlikely to show such hesitation. Therefore, the likelihood of this scenario occurring is very small.
Thus, in my opinion, following the results of the June meeting, the Fed may resort to either a hawkish or an "ultra-hawkish" scenario. That is, either the Fed raises the rate by 50 points and undertakes to maintain this pace until the end of the year (not excluding a 75-point increase), or the central bank really decides to increase the rate by 75 points at once. The second option will allow the dollar to significantly strengthen its position throughout the market, and together with the euro - to test five-year lows in the area of 1.0350-1.0340 with a possible impulse movement to the bottom of the 3rd figure.
If the baseline scenario is implemented, the dollar will maintain its positions against the euro in the medium term, however, the price decline is likely to be more "protracted", with quite impressive upward rollbacks. And, in the end, we can not rule out the aforementioned conditionally dovish scenario, in which the Fed will show hesitation regarding further actions after the July hike. In this case, EUR/USD bulls will be able to return to the range of 1.0640-1.0760 with a second attempt to approach the boundaries of the 8th figure.
