Central banks are beginning to use the phrase “more forceful” in one form or another in their communications related to policy tightening plans in order to curb inflation. For risk assets as well as for cyclical currencies this means continuing pressure. For the US currency, the consequences of such a trend in the policy are definitely positive.Already in May, at least three central banks were building communications to prepare markets for aggressive moves. The Bank of Mexico hinted in May that it was going to increase the pace of tightening from 50 bp to 75 bp. The RBNZ this week also used the language mentioned above, and the Bank of Canada made it clear that it will spare no expense to fight inflation. This week is a period of silence for Fed officials as the meeting takes place next week, but the US Central Bank is likely to join the chorus of hawks.Inflation in the US for May was a sheer surprise – headline inflation rose from 8.3% to 8.6%, refuting the opinion that a pause in the uptrend (8.5% in March and 8.3% April) is a signal for a reversal. Core inflation rose from 5.9% to 6.0%, which is more serious since it does not include volatile goods (such as fuel or food), which means that consumer price growth is likely to be persistent.Risk assets turned lower after the CPI release, S&P 500 futures fell below 4000 points. The 2-year Treasury yield has risen to nearly 3%, with Fed rate futures pricing in a cumulative tightening of 215 bp this year. The dollar index rose by half a percent and is approaching the level of 104. EURUSD seems to be testing 1.05 and most likely the sellers will send the pair below the level. GBPUSD is approaching 1.24, however, the yen shows resistance to the dollar, USDJPY is declining as Japanese investors reduce investments in US risk assets on expectations that the Fed will choose an even more aggressive pace of tightening rates and inform the market about it at the upcoming meeting. Also, the yen is strengthening thanks to the comments of the Japanese Central Bank and the government that the authorities may react to excessive devaluation.It is highly likely that next week, ahead of the Fed meeting, the dollar will continue its upward trend, as the correction after the recent high is technically over and the retest of recent highs has a higher chance of being successful:
Source: Tickmill
