The US dollar has once again resumed its growth, breaking out of a two-week bearish rally and attempting to gain a foothold above 102.00 points. The dollar edged higher following the meeting between US President Joe Biden and Federal Reserve Chair Jerome Powell, which took place at the White House on Tuesday.
The president's top priority was discussing the Fed's actions to combat inflation and prevent further inflationary pressure, which is causing significant discontent among US citizens. Biden said he respected "the Fed's independence," giving the central bank the space to address inflation as it sees fit. In other words, the US president has approved an aggressive interest rate increase and the reduction of the Fed's $9 trillion balance sheet.
Traders took Biden's rhetoric as a clear hawkish signal, amplifying the "tough" talk from Fed board member Christopher Waller the day before. Waller said the central bank needs to keep raising interest rates in half-percentage point steps until inflation is substantially curbed.
At the same time, the rate itself may well exceed the neutral 2.50-2.75% target range by year-end. Waller noted that only multiple big rate hikes could slow down consumer demand and decrease price pressure. All voting members of the FOMC share this view, which makes a 50 basis point rate hike in June practically a done deal.
The Fed's further monetary policy course will largely depend on the upcoming inflation report, released on Jun. 10, a few days before the Fed meeting. Although most market participants believe that inflation in the US has already peaked and will only decline from now on, we think differently.
In our opinion, the US consumer price index will reach 8.7% in May and may exceed 9% by the end of the summer, hitting its highest in more than 45 years. Higher oil and gas prices in the US domestic market will be the main driver of inflation.
According to the latest data, average gas prices were at a record $4.62 this week, up from $4.18 a month ago. In May alone, fuel costs increased by more than 10%. The main factors that will continue to contribute to the increase in the price of hydrocarbons are: the EU ban on Russian oil imports by sea, the prospects of a recovery in China's demand as the country eases its Covid restrictions, as well as the beginning of a driving season in the US as petrol prices continue to break records.
The upcoming Fed meeting, coupled with the scheduled increase in the key interest rate to ease inflationary pressure, should be considered a potential trigger for the US dollar, which may push the DXY index to its 20-year highs around 104.00-105. 00.
