Sunrise Market Commentary – ActionForex

Markets

Needless to say that new Fed chair Warsh made it clear that he wants to break with the Bernanke-Yellen-(Powell) era. Inflation has been running above target for five years and it’s time to fix that. The Fed will deliver on its price stability target and wants markets to take the lead. Less is more when it comes to communication. While a task force is responsible to figure out a new communication strategy by autumn, Fed members clearly got their in-between instructions. The amount of public comments following Wednesday’s FOMC meeting: zero. Up until last meeting, they tripped over each other to defend personal views and opinions. Next week, only four public appearances have been scheduled so far, with only one of them definitely focused on monetary policy (Chicago Fed Goolsbee on Friday). So far, Warsh gets what he wants from markets as well. On Tuesday, they fully discounted a rate hike by the January 2027 policy meeting. After the FOMC meeting, they repositioned towards October of this year. By yesterday’s close, a September rate hike is fully discounted with the market implied probability of July action rising to almost 40%! All it will take is one more inflation report to take this all the way to 100% given that the Summary of Economic Projections showed that half of the committee deems it necessary to hike the policy rate at least one time this year. May PCE deflators (published next Thursday) are the next key reference with June CPI numbers due on July 14. The prospect of Fed rate hikes backed by economic strength helps the US dollar take the lead on FX markets. EUR/USD fell from 1.16-levels on Wednesday to currently 1.1425 and prepares a test of the downside of the sideways range in place for almost a year now (1.1392). In case of break, we look at 1.1340 (38% retracement on 2025 rally) and 1.1111/1.1065 (50% retracement and May 2025 low). USD/JPY serves as catalyst for overall dollar strength. The pair tested the 2024 top at 161.95. A break higher is likely as the BoJ’s gradual normalization process is no match for the hawkish shift by the Fed. Japanese officials know that they won’t be able to make their verbal intervention treats hard as they fight an uphill battle against genuine USD strength. Prepare for highest USD/JPY levels since 1986. Today’s eco calendar is extremely thin with US markets closed (Juneteenth holiday). ECB chief economist Lane is scheduled to speak, but already did so yesterday. He indicated amongst other that the upper range of neutral has crept up to 2.5%, suggesting space for another ECB rate hike this Summer.

News & Views

Japanese inflation was close to expectations, holding near the April levels. Inflation ex fresh food rose 0.5% M/M and was unchanged at 1.4% M/M with government measures to temper the cost of energy prices/living still in play. The core measure ex-food and energy printed at 0.2% M/M and 1.8% Y/Y from 1.9% in April. Gasoline prices were 7% lower Y/Y. Education (-6.1% Y/Y) and utilities price (-1.1%) served as a drag on yearly inflation as well. Food prices increased by 0.2% M/M and 3.5% Y/Y. Underlying trends still support the BoJ’s normalization process. BoJ Himino warned for the risk of price trends rising above the 2% target. The weak yen also continues contributing to upward inflationary tendencies. Japan Finance Minister Katayama again warned that Japanese authorities can take bold action against excessive speculative moves.

The Czech National Bank (CNB) raised its policy rate yesterday by 25 bps to 3.75%. Six members supported the rate hike decision. One member voted to leave the policy rate unchanged. The CNB analyses that even as inflation has been close to target of late, there is a risk that it might temporary increase slightly end 2026/early 2027. More importantly, core inflation remained elevated for six months without showing a downward tendency. Yesterday’s rate hike aims to tighten monetary conditions sufficiently to lower this trend. In a broader macro perspective, the CNB also indicates that accelerating credit growth and debt financing of increased public expenditure are fostering a rise in the quantity of money. At the same time, the labour market remains tight and wages are rising at a rapid pace. Prices are increasing above all in the service sector, whose price dynamics are a substantial component of core inflation. Yesterday’s decision aims to maintain a low-inflation environment. At the press conference, governor Michl indicated that the board leaves future rate options open. The koruna yesterday lost some ground after the decision/press conference with EUR/CZK closing near 24.21 (from an open near 24.16).