This is attributable to the repercussions of the US CPI report issued last week on Friday, which frightened investors into fearing that the Federal Reserve is losing its grip on price surges across the economy as of late. Thus, the Federal Open Market Committee (FOMC) meeting scheduled for June 15 has come to the forefront.
The reported CPI statistic of 8.6% year-on-year (YoY) at the end of May was higher than the expected 8.3%. Its current amount is concerning already, but the re-acceleration of growing prices is even more so.
PPI came in at 10.8% for the period at the end of May, rather than the 10.9 % predicted. Despite the fact that PPI was slightly below expectations, the worry still is that increasing costs for producers and businesses are likely to trickle down into CPI and affect the index.
Firms can either withstand the greater costs and lose profit margins, or they can pass the costs on to customers. Passing on increasing costs is the preferred choice in the United States’ free-market economy.
The Federal Reserve is now faced with this risk, and the anticipation in the market for a rate increase on June 15 has risen to 75bps from 50bps. The wording used in the post-meeting press conference will be keenly scrutinized for hints about the prospects for future increases.
The downside risk of hyperinflation becomes a popular concern if the opinion is not as hawkish as the market expects. Treasury rates have risen throughout the curve as a result of the Federal Reserve’s additional raising of rate hike expectations. The US Dollar has risen in value as interest rates have gone up.
The options market suggests a scurry for risk reversals on a stronger USD against EUR, GBP, AUD, NZD, and CAD ahead of the meeting on June 15.
They are increasingly favoring puts against USD calls for these currencies. Risk reversals in the CHF and JPY are more balanced when compared to the USD.
The response to Fed measures and remarks could provide clues for a prospective USD trend.
