Will the Fed take a hawkish pause?

The "blackout" period for representatives will begin tomorrow FOMC. This means that we will not receive any comment on the future of monetary policy until next week's Fed meeting. Important data on the labor market have already been presented. Yesterday negatively surprised ISM for services. We still have the inflation release next Tuesday ahead of us, which may shed some light on the current situation.

Higher chance of "pause"

Yesterday, higher volatility in the market appeared at 16. Then the ISM report for US services was published. he fell out below expectations and fell to a five-month low. The main indicator was 50,3 points. (consensus 52,3 points). The employment index fell to 49,2 points (below the borderline level of 50 points) and the sub-index of prices paid decreased from 59,6 in April to 56,2 in May. Worse data mean that the market assumes a greater chance for a "pause" in interest rate hikes. in the US at next week's meeting.

The market currently gives approx. 25 percent. chances for an upward move on rates in June and over 50 percent. for a raise in July. There is little macro data ahead of us. The market will only be there now focused on the outcome of inflation dynamics in May, and this one will be given in exactly one week.

No change in interest rates

Forecasts show a clear fall in headline inflation year-on-year from 4,9 percent. in April to 4,1 percent. in May and a decrease in the base measure dynamics from 5,5 percent. up to 5,2 percent y/y Estimated such a clear decline suggests that the Fed interest rates will not change. Only a surprising result (strongly different from the consensus) may trigger market speculations about a different decision (eg if the CPI surprised with a higher result than in April).

One of the scenarios for next week's meeting is the so-called "hawkish pause", which would consist in leaving the cost of money unchanged but with a simultaneous declaration of considering a July hike. Much will depend on new projectionswhich the Federal Reserve will present in June.

At the same time, there is no certainty as to what position the Council will take EBC. We have recently received hawkish comments from Lagarde and other Council officials. However, there were also "dovish" statements. As in the case of the Fed, members of the ECB Council are also not allowed to speak one week before the next meeting. This means that the euro is unlikely to get much more momentum until June 15.

Source: Łukasz Zembik, OANDA TMS Brokers