FX Update: Yields on fire with bevy of CB meets ahead.

[FXMAG]

Summary: The US CPI and inflation expectations data on Friday jolted the US dollar back higher as the market sharply raised the Fed rate hike trajectory at coming meetings. Liquidity conditions are looking dire for the riskiest assets here and EM- and G10 small currencies are suffering aggravated weakness on the general deleveraging fallout. A string of important central bank meetings up this week, led by the FOMC meeting Wednesday, but the SNB Thursday and BoJ Friday could also provide fireworks.

FX Trading focus: US data jolts US dollar higher ahead of FOMC. SNB, BoE and BoJ also this week.

The market was clearly ill-prepared Friday for signs that US inflation is proving stickier than anticipated. First, the May US CPI data out Friday saw a +0.6% MoM ex Food and Energy reading versus a drop to +0.5% expected, and the headline was a whopping +1.0% vs. 0.7% expected, and this took the headline year-on-year reading to a new multi-decade high of 8.6% rather than staying steady at 8.3%. Second, the preliminary University of Michigan Sentiment reading for 5-10 year inflation expectations jump 0.3% to 3.3%, breaking the 3.0% range high that was only violated once since 2011 and posting the highest reading since two months of 3.4% in 2008, in turn the highest readings since the early 1990’s.

The latter is easily as critical a factor in the FOMC deliberations this week as the UMich inflation expectations series is one of the inputs into Fed models and is suddenly flashing a far deeper shade of red since first reaching the 3.0% range high all the way back in May of last year. It is also possibly setting up an embarrassing situation for the Fed after Powell pushed back against the idea of 75 basis point rate hikes at the May 4 FOMC meeting. The market is already second guessing the Fed here, pricing 119 basis in total for the next two meetings combined, and leaning a bit more for the possibility that July sees a larger-than-50 bps hike. The US treasury yield curve was flattened by the move, with the 2-10 slope reaching zero at one point today. Already the EuroDollar strip is pricing for the Fed to begin easing rates by H2 of next year after the aggressive move higher in short yields on Friday’s data.

https://www.fxmag.com/forex/fx-update-yields-on-fire-with-bevy-of-c...