Summary The Consumer Price Index increased 1.0% in May, topping consensus expectations for a 0.7% increase and our own forecast for a 0.8% gain. Inflationary pressures were seen nearly everywhere. Energy prices surged, led by a 4.1% increase in gasoline prices, while grocery prices increased 1.4% and pushed the year-ago rate to a pace not seen since the 1970s. Core goods inflation had shown some signs of slowing over the past few months, but this trend largely reversed course in May. Core goods prices increased 0.7%, led higher by apparel and vehicles. Core services inflation rose at a similar pace and with broad-based drivers including surging airfare prices and solid gains in shelter costs. Simply put, inflation remains far too high for the Federal Reserve's liking. Until inflation is demonstrably on the downswing, we expect the FOMC to fight back aggressively with tighter policy. Another 50 bps rate hike is all but assured at next week's FOMC meeting, and a couple more 50 bps hikes in July and September seem highly likely. Across the board pain The "clear and consistent" progress Fed officials are looking for on inflation remains elusive. The Consumer Price Index rose 1.0% in May, pushing the year-over-year rate to a fresh high of 8.6%. What's more, the worst prints are yet to come by our estimations. We suspect that the formidable momentum in inflation could push the headline rate for CPI close to 9% as early as next month. If that's not bad enough for consumers and the Fed, CPI inflation is likely to stay near those levels through the autumn. The pushback in timing on "peak" inflation comes amid a further climb in energy prices. Gasoline prices rose 4.1% in May but have since catapulted to just shy of $5 per gallon nationally which points to an even larger monthly gain in June. Utility bills are also on the rise. Costs for energy services (electricity and piped gas) increased 3.0% in May and are likely to climb further amid the steep rise in natural gas prices and still unseasonably-low inventories. Meanwhile, food inflation remains unrelenting. Grocery prices shot up another 1.4%, bringing the one-year rise to 11.9%–a rate unseen since the 1970s. Prices for food away from home did not increase quite as much but were still up a robust 0.7% in May. Download The Full Economic Indicator

The dollar accelerated higher after US inflation data on Friday and hit the highest in three weeks. Much hotter than expected inflation fueled expectations for more aggressive Fed in coming meetings, although the central bank already showed its hawkish stance and readiness to use all available tolls to bring soaring prices under control. From the technical point of view the picture remains firmly bullish, as today’s rally surged through  key Fibo resistance at 103.61 (61.8% of 105.04/101.29 bear-leg) and also cracked the next level at 104.16 (Fibo 76.4%), 14-momentum is in stee=p ascend in the positive territory and rising thick daily cloud continues to underpin the action. Also, the index is on track for strong weekly gains (around 2%) and completed reversal pattern on weekly chart, signaling that 105.04/101.29 corrective pullback is likely over. Short-term outlook remains bright for the greenback, as inflation is expected to remain red-hot for some time (until Fed’s measures start to give results) and geopolitical uncertainty over the Ukraine crisis will continue to boost demand for safe-haven dollar. Overbought conditions suggest bulls would face headwinds on approach to key barrier at 105.04 (2022 high) with limited dips to offer better buying opportunities. Res: 104.68; 105.04; 105.93; 106.48 Sup: 103.92; 103.61; 103.17; 102.94

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FOMC meeting – 15/06 – as we look ahead to another Federal Reserve meeting it will surprise no-one that the Fed will be raising rates by another 50bps this week to 1.5%, to be followed by another 50bps next month. This month also sees the start of the balance sheet reduction program starting with $47.5bn, rising to $95bn a month after 3 months. In recent weeks, the debate has shifted from the certainty of 50bps rate hikes in June and July and has moved towards the prospect of another 50bps in September.  A number of Fed policymakers have indicated they want to see the Fed funds rate back to neutral by the end of this year, with a consensus of around 2.5%, however there is still some divergence where the neutral rate actually is. Kansas City Fed President Esther George has suggested 2.5% as a starting point, while St. Louis Fed President James Bullard put it lower earlier this year at 2%, while calling for rates to rise to 3.5% by year end. Atlanta Fed President Raphael Bostic also appears to be in the camp of a lower neutral rate of between 2% and 2.5% while also floating the idea of a hiking pause in September. Whether we see a pause in September is likely to depend very much on the inflation outlook, with the latest surge in May CPI making that prospect much less likely, which means that all the talk of a 50bps move post Jackson Hole is unlikely to diminish. Much will depend on how the Fed sees fit to update its inflation forecasts which are still well below current levels. In March, the FOMC upgraded their inflation forecast for 2022 to 4.3% from 2.6%, and in 2023 to 2.7% from 2.3%, while downgrading GDP to 2.8% in 2022 and 2.3% in 2023. A further upgrade to the inflation outlook is likely to be considered hawkish, while leaving it unchanged might suggest that the Fed’s concerns over rising prices are diminishing.       Bank of England decision – 16/06 – the Bank of England has raised rates at every meeting this year, and with headline inflation now at 9% it’s hard to see how they won’t raise rates by 25bps again when they meet later this week. When they met in May three policymakers pushed for a 50bps hike, while the economic forecasts painted a dire outlook for the second half of the year. While this year’s GDP forecast was left unchanged at 3.75%, despite a predicted Q4 contraction of around 1%, the bank revised its 2023 GDP forecasts down to a -0.25% contraction. The MPC also predicted that inflation would start to fall back to target in around 2 years. Another rate increase this week became more likely after the announcement last month of another fiscal aid package, which should go some way to helping support the economy over the course of the rest of the year. We can probably assume that Haskel, Saunders and Mann will vote to hike given they voted for 50bps in May, which means that we only need to see two more members to join them. The bigger question is whether the MPC will go further in their determination to ramp down on future inflation expectations in a fashion similar to the Federal Reserve who have become much more hawkish in recent weeks. Bank of England governor Andrew Bailey has gone to great lengths in recent months to insist there is little the central bank can do about supply chain problems, which is true, but it’s not something the central bank should be admitting. Another communications failure on his part. He still has a responsibility to focus on what the MPC can do, namely inspire confidence that the central bank won’t hesitate to act to underpin inflation expectations, as well as put a floor under the pound’s 10% decline against the US dollar in the past 12 months which has done so much to exacerbate the inflationary impulse hitting the UK economy. Simply proclaiming that it’s not the Bank of England’s fault that inflation is so high is simply not good enough, and also complete nonsense to boot, and runs contrary to the available evidence, which as far back as November last year pointed to the fact that the Bank of England was being complacent about inflation risk. We can expect to see a 25bps move, but we really ought to be matching the Fed with a similar 50bps move.   Bank of Japan decision – 17/06 - the Bank of Japan has set itself apart from other central banks by pledging to keep rates low despite rising inflationary pressures. The decline in the Japanese yen year to date reflects this policy of neglect on the part of the central...

Summary United States: Prices Push Higher in May, Signaling Little Immediate Relief for Consumers Consumer price inflation continued to push higher in May, with the consumer price index rising more than expected and lifting the annual rate of inflation to a fresh 40-year high. Consumers continue to feel the pinch of higher prices, evident in the persistent deterioration in consumer sentiment. To date, households have demonstrated uncanny staying power in the face of inflation, but with little signs of immediate relief from prices, this will only become more challenging. Next week: Retail Sales (Tue), FOMC Rate Decision (Tue), Housing Starts (Wed) International: European Central Bank Readies Rate Hike as Reserve Bank of Australia Delivers The European Central Bank (ECB) took another step this week on its path of policy normalization at its latest monetary policy announcement. The ECB said it intends to raise rates by 25 bps in July, perhaps by an even larger amount in September, and deliver a steady series of rate hikes over time. The Reserve Bank of Australia surprised markets with a larger-than-expected 50 bps rate increase, which we expect it will follow up with another 50 bps hike at its July announcement. Next week: U.K. GDP (Mon), China Retail & Industrial Activity (Wed), Australia Employment (Thu) Interest Rate Watch: SNB and BoE Hold Policy Meetings Next Week We expect the Swiss National Bank to remain on hold next week, but we look for it to commence a tightening cycle later this year. We expect the Bank of England to hike rates by 25 bps on Thursday. Credit Market Insights: Consumer Credit Is Up, Household Net Worth Is Down Consumer credit had yet another strong month in April rising $38.1 billion, a near-record increase bested only by the prior month's unprecedented surge. Meanwhile, household balance sheets slipped in the first quarter as household net worth declined for the first time since Q1-2020, when COVID initially struck. Topic of the Week: Budget Deficit Shrinks...For Now Fiscal year 2022 is now nearly three-quarters complete, and the federal budget deficit has narrowed significantly. Our current forecast is for the federal government to incur a budget deficit of $900 billion in FY 2022. If realized, this would be a smaller deficit than the one that prevailed before the pandemic. Download the full report here

The coming week is loaded with central bank meetings to shake things up in the FX arena. Fed officials are almost certain to raise rates by half a percentage point, so markets will be driven mostly by their future projections. The Bank of England could also lift rates but strike a cautious tone. Nothing is expected in Japan, while Switzerland might disappoint those looking for immediate action.