FX.co ★ Dipping US inflation could halt Fed rate hike

Markets await the Fed's two-day monetary policy, as the bank's interest rate decision could significantly affect investor sentiment.

Reportedly, compared to the previous 21.9% probability of an increase, many now see a 78.1% chance that the Fed will take a pause, not announcing any raise in the key interest rate. If this happens, risk appetite will surge, favoring company stocks. Meanwhile, Treasury yields may either stabilize or decrease, likely leading to a downward correction in dollar.

But this scenario will happen only if consumer inflation in the US shows further decline. To be precise, it could occur if the CPI data stays in line with the forecast - coming out at 4.1% y/y compared to 4.9% for the previous period, and showing a 0.2% m/m growth or even lower compared to the April increase of 0.4%.

The rally that began at the end of last week may continue in the stock markets as early as tomorrow, and dollar can be expected to face pressure primarily from those currencies whose central banks, through their representatives, persistently indicate a desire to continue the cycle of interest rate hikes.

In short, declining US inflation, fading likelihood of a recession, and positive outlook in the labor market will contribute to increased optimism in investor environment, supporting demand for stocks and commodity assets while stimulating the selling pressure on dollar.

Forecasts for today:

EUR/USD

The pair trades below the strong resistance level of 1.0785. Overcoming this level on a wave of investor optimism, hoping that the Fed will pause its rate hikes, could lead to an upward movement towards 1.0860.

GBP/USD

The pair trades upward in anticipation of a rate hike by the Bank of England and, conversely, a pause from the Federal Reserve. An increase in price above this level could stimulate a rise towards the level of 1.2680.