FX.co ★ Fed silence unnerving markets: High probability of a local decline in GBP/USD and EUR/JPY pairs)

While investors do not show noticeable activity in the markets and do not react to clear signals of a slowdown in the rate of inflation in the United States, it should force the Fed to begin the process of lowering interest rates, theoretically speaking.

Earlier against the background of extremely weak data on the number of new jobs that the American economy received in May, there was a surge of optimism in the markets, which led to a local increase in demand for risky assets and a weakening of the US dollar. In their opinion, investors received another argument to the fact that the Fed should lower rates in the current year. The same signal was heard with the publication of the values of industrial inflation, which under review, decreased over the previous period but the markets have not responded to this.

Although, the reaction of bidders to the output of consumer inflation data in the United States this Wednesday was already quite unexpected. The values turned out to be worse than the estimated figures in general, which already had to fall in May relative to the April value in monthly terms and the May figure a year ago.

According to the data presented, the consumer price index year on year in its growth decreased to 1.8% against 2.0%, while it was expected to drop to 1.9%. In monthly terms, the indicator showed an expected increase in May of 0.1% against a growth of 0.3% in April. The base consumer price index on an annualized basis was at the level of 2.0% versus 2.1% a year earlier. The monthly value of the indicator maintained the previous growth rate of 0.1% against the expectation of its increase by 0.2%.

The data presented clearly indicate that inflationary pressure in America is weakening, which, according to the general, now dominant, rules of the monetarist approach to regulation should force the Fed to lower interest rates. In fact, it is the main reason for the growth of positive sentiment in the markets, which are undoubtedly right, but there are a number of reasons constraining the regulator from the decision to lower the cost of borrowing and we have repeatedly pointed out to this earlier.

The first and most important is the high risk of a surge in rising prices and, as a result, inflation in the States against the background of trade wars unleashed by D. Trump. The second reason is a high probability of a recession in the global economy and in this case, there will be a natural fall in demand for risky assets. It is not yet clear what the course of events will be. We will observe sharp changes in investor sentiment and ambiguous dynamics in world markets, including currency markets. It is likely that only another hint from the Fed that it will resolutely fight negative trends in the national economy will become a new reason for the growth of optimism in the markets.

Forecast of the day:

The GBP/USD pair is trading in the range of 1.2675-1.2740. It can continue to fall to 1.2600 while overcoming the lower limit of the range.

The EUR/JPY pair is falling against the background of two reasons. One of which is the demand for the yen as a protective asset in the face of uncertainty in the markets and the other is the weakness of the euro on the wave of expectations of new stimulus measures from the ECB. A breakthrough of the pair to the level of 122.15 will lead to its fall to 121.70.