​​​​​US CPI and FOMC preview: dollar bulls in the driving seat following payrolls

​​​Latest payroll report smashes expectations

​Friday’s non-farm payrolls report dealt a further blow to hopes that the Federal Reserve (Fed) would cut rates in 2024. Once more, the US economy defied expectations and added more jobs than forecast.

​While the previous month’s figure was revised down, and though payroll growth was slower than expected, the continued resilience of the US jobs market shows that the American economy remains strong, and with it the outlook for consumer spending.

​The Fed has kept a close eye on the employment picture, but for the moment there is no sign of it weakening, thus reducing the pressure to cut rates. The latest payroll number is just another nail in the coffin of the idea that 2024 will see any rate cuts.

​US CPI – what to expect

​The big economic data point of the week will be the latest US inflation reading.

​While price growth has declined sharply from the highs of 2022, the slowdown has now stalled around the 3% mark, higher than the Fed’s 2% target. Fed officials have repeatedly stressed the need for more progress in the direction of 2% before they can consider cutting rates, and this week’s announcement is unlikely to provide the necessary move in price growth.

​FOMC meeting on Wednesday – what will the Fed do?

​Wednesday is scheduled to see the latest Fed decision as well, at 7pm (London time).

​No change in rates is expected, and after the recent payrolls report we may find that the commentary around the decision is more hawkish than previously. Depending on how the inflation reading comes in, the Fed may find it necessary to step up the hawkish outlook even more.

​A hawkish Fed is likely to put more strength in the US dollar, and might well cause another drop in US indices, particularly the Russell 2000, which has a habit of reacting poorly to hawkish Fed news.

​US dollar outlook – more upside to come?

​The dollar has delighted in confounding traders over the past month.

​The dollar basket has been in a strong uptrend from the low of December, when it slumped to its lowest level since late-July, as exuberant forecasts of 6 rate cuts in 2024 took hold across markets. But as these expectations have been steadily trimmed back, so the greenback has made further gains.

​Early June however saw the culmination of the pullback from the May highs, when the price delighted dollar bears with a close below the 200-day simple moving average (SMA), and a close below trendline support from the December low.

​But those hoping for a new leg lower for the dollar basket were swiftly disappointed, as the price rebounded last Friday following the solid payrolls report. The price closed back above the 200-day SMA, back above trendline support from December, and then moved to close above trendline resistance from the May highs.

​​This ‘triple whammy’ has been solidified today with a move above the 50-day SMA. As we head towards the consumer price index (CPI) report and the Fed meeting, the dollar bulls are firmly in control. A move back towards the highs of April and May around 106 now seems likely. A big reversal back below 104 is needed to negate this view.

​US dollar basket