Sunrise Market Commentary – ActionForex

Markets

The FOMC concludes its first meeting under new Chair Warsh tonight. The new policy statement is expected to drop the slightly dovish bias that was still present in April, even though it already faced considerable resistance and dissent at that meeting. The specific sentence — “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.” — suggests that the next move would be a rate cut, reflecting the previous policy trajectory before the pause.

Recent US economic data have shifted the Fed’s focus from downside employment risks toward upside inflation risks. The US economy has begun to outperform, with the labor market moving beyond its earlier “no hire, no fire” dynamic and returning to net hiring. The three-month average payroll gain of 188k is the strongest since March 2024. Inflation is moving further away from target as the energy supply shock continues to work its way through the economy. PCE inflation reached 3.8% y/y on the headline measure and 3.3% y/y on the core measure in April, while May CPI data pointed to further pressure ahead.

The updated Summary of Economic Projections is expected to reflect these developments, with Fed officials’ rate forecasts (the dot plot) likely showing a more hawkish shift. In March, the median projection still suggested one additional rate cut this year and another in 2027. By contrast, money markets are currently pricing in one rate hike over the next 12 months. The overall Fed message is expected to reinforce support for the front end of the US yield curve and could provide support for the dollar.

Today’s dot plot may prove to be the final version published by the Fed if one of Warsh’s first major initiatives is to overhaul the current communication framework. Warsh has argued that tools such as the dot plot and forward guidance create unnecessary volatility in a post-ZIRP environment. He has also expressed a preference for economic projections produced by staff economists, similar to the Eurosystem model, rather than projections based on individual policymakers’ assumptions. Other potential changes include reducing the frequency of press conferences and limiting public remarks by policymakers.

Today’s economic calendar also features the ECB wage tracker, an important indicator for assessing whether higher prices are feeding through into wage growth. Recent ECB commentary has emphasized that the end of the Iran conflict should not be confused with the end of the energy shock. Policymakers continue to lean toward at least one additional rate hike in the near term before reassessing conditions.

ECB Chief Economist Lane noted yesterday that Eurozone inflation is likely to remain above 3% for four months because of energy costs, with indirect effects on food, goods and services expected later this year and into next year.

UK CPI data for May released this morning were mixed. Headline CPI rose 0.2% m/m and remained at 2.8% y/y, below the expected 3.0%. Core CPI increased from 2.5% to 2.6%, slightly below consensus expectations of 2.7%, while services inflation accelerated from 3.2% y/y to 3.7% y/y, above the expected 3.6%. Sterling weakened modestly following the release, with EUR/GBP trading near 0.8650.

US retail sales will also be published today, although they are unlikely to generate significant market reaction ahead of the FOMC decision.

News & Views

According to a draft memorandum between the US and Iran seen by Bloomberg, Iran will receive substantial financial and economic support as part of the agreement that is expected to be signed by both countries. The deal is intended to establish a framework for resolving Iran’s nuclear program and ending the Strait of Hormuz blockade.

The United States and regional partners are reportedly preparing a comprehensive rehabilitation and economic development plan for Iran, with financing of at least USD 300 billion. The US is also expected to lift all sanctions currently imposed on Iran. Immediately after the memorandum is signed and before sanctions are formally removed, the US would issue waivers allowing Iranian exports of crude oil and other goods and services.

The US would also commit to facilitating access to frozen Iranian assets and restricted funds, although no specific timetable has yet been provided.

Japanese trade data showed a deficit of JPY 378.6 billion in May, compared with a surplus of JPY 301.9 billion in April on an unadjusted basis. Imports rose 12.5% y/y while exports increased 17.0% y/y. However, both series were distorted by yen weakness, which boosted the value of both imports and exports.

Export volumes increased by only 0.5% y/y, while import volumes declined by 6.8%. In volume terms, exports to the US rose 9.3% y/y and imports from the US increased 12.5%. Trade with Europe was weaker, with export volumes rising just 0.7% y/y while import volumes declined 7.2%.