US
Brent crude oil prices continued to slide, testing important technical support at the 200-day moving average of $78.46/bbl. USD is consolidating just above this week’s low, after surrendering more than half of its post May non-farm payrolls gains. A hawkish Fed hold will support a firmer USD, but Fed Chair Kevin Warsh risks spoiling the dollar bull party.
US May retail sales report is up next (1:30pm London, 8:30am New York). Total nominal retail sales are expected at 0.6% m/m vs. 1.7% in April underpinned by a 0.5% m/m increase in prices. The policy relevant control-group sales - which exclude cars, gas, food services, and building materials – is seen rising 0.4% m/m vs. 0.5% in April. That would be consistent with resilient real personal consumption spending as core goods CPI fell -0.1% m/m in May.
The FOMC policy decision is today, Kevin Warsh’s first as Fed chair (7:00pm London, 2:00pm New York). The press conference is 30mins later. That meeting also features an update to the Summary of Economic Projections (SEP). The FOMC is widely expected to keep the target range for the funds rate at 3.50%-3.75% for a fourth straight meeting.
The center of gravity on the FOMC has shifted from an easing to a neutral bias as US labor demand has improved and inflation has moved up. As such, the focus will be on the degree of hawkishness and whether it validates Fed funds futures pricing for a 25bps hike by year end or leans against it. The clearest signal will come from the dot plot, which is expected to shift from implying a 25bps cut in 2026 to a median projection consistent with a 25bps hike.
The other key focus is Fed Chair Warsh. Markets will watch whether he joins the majority in keeping rates on hold or dissents for a cut, becoming the first Fed Chair in history to be outvoted on policy. Just as important will be how he frames communication around the policy outlook, particularly his treatment of the SEP and his characterization of the inflation backdrop.
Warsh does not believe in forward guidance, so expect him to downplay the importance of the SEP and dot plots. Warsh also said he preferred to follow “trimmed averages” inflation as opposed to core PCE. The Dallas Fed trimmed mean PCE and the Cleveland Fed 16% trimmed mean CPI are currently below core PCE, implying room for the Fed to loosen policy.
Check out our report here to see what a Kevin Warsh-led Fed means for markets beyond this week’s decision.
UK
GBP/USD is directionless around its 200-day moving average (1.3417), while gilts are outperforming European bonds. UK May CPI was soft and suggests the Bank of England (BOE) will not be in a rush to tighten policy. Headline CPI unexpectedly remained at 2.8% y/y (consensus: 3.0%, BOE projection: 3.3%) for a second straight month while core CPI rose less than expected to 2.6% y/y (consensus: 2.7%) vs. 2.5% in April. Services CPI ran hot at 3.7% y/y (consensus: 3.1%) vs. 3.2% in April but tracked below the BOE’s 3.9% projection.
The swaps curve pushed out the pricing of a first full 25bps BOE rate rise to December from November. We expect GBP/USD to edge lower and stabilize closer to 1.3100, reflecting a stronger US growth outlook relative to the UK and the murky UK political backdrop.
SWEDEN
The Riksbank delivered a hawkish hold, in line with market pricing. The Riksbank left the policy rate unchanged at 1.75% for a sixth consecutive meeting (widely expected) and signaled that “the probability that the rate will be raised later this year has increased in relation to the assessment in March.”
The Riksbank stressed that while inflation in Sweden is still low, the energy supply disruptions caused by the war in the Middle East “increased the risks of inflation being too high.” Accordingly, the Riksbank’s policy rate forecast has been revised a little higher but still converges towards the middle of the bank’s estimated interval for the neutral rate (1.50% to 3.00%) by 2029.
SEK dipped versus USD and EUR because the revised Riksbank policy rate path offered few hawkish surprises, with a year-end hike already priced and the terminal rate left unchanged.
