Fed Keeps its Cool
As we wrote yesterday, Wednesday's shockingly high inflation data from the US, which showed that headline CPI jumped 9.1% in June to the highest level in four decades, puts more pressure on the Fed for another outsized move on rates next week.
Two prominent Fed hawks and voters however, did not break away from the central bank's clearly communicated path for a 50-75 basis point hike, speaking after the CPI release.
In an interview on Nikkei Asia, St Louis Fed President Bullard did not favor a more aggressive full percentage point rate adjustment, saying that he "would advocate a 75 basis points again at the next meeting" and that the bank is "on a good pace, for now". 
Separately, Governor Waller also supported "another 75-basis point increase" at the upcoming meeting, but noted that if today's retail sales and next week's housing data come in "materially stronger" than expected, then he could "lean towards a larger hike". 
Markets Expectations Split
The CPI report had sparked an aggressive repricing in markets expectations, with CME's FedWatch Tool projecting a full percentage hike this month yesterday, with around 80% probability. However, yesterday's reserved stance from the aforementioned super-hawks, poured cold water on those bets.
At the time of writing, CME's FedWatch Tool shows a split probability, between a 1% and a 0.75% rate increase, in next week's meeting.
The Fed's communication blackout period kicks-off over the weekend and this makes the delivery of a 100 basis points hike harder in our view, since up until now, officials have not really prepared markets for such an outcome.
Markets have been fretting over prospects of a global recession due to surging inflation, high energy prices and supply disruptions, as well as the aggressive monetary tightening form many major central banks.
Today markets remain on edge, as economic data from the world's second largest economy, provided a fresh source of worries. The Chinese economy contracted by 2.6% in the second quarter (quarter-over-quarter), although it managed to eke out 0.4% growth on a yearly basis.
June Retail Sales were the bright spot of today's data, since they rose 3.1% year-over-year, while Industrial Output strengthened by 3.9%, albeit less than expected.
The US Fed is ahead than most of its major counterparts with front-loaded rate hike cycle and this differential is most pronounced against the Bank of Japan, which has led to massive rally of USD/JPY.
The pair gains close to 2% this week, having hit fresh twenty-four year highs on Thursday, in the aftermath of the shockingly high inflation form the US, which reinforces the Fed's tightening.
This has brought the September 1998 high (142.49) in the spotlight, although bulls will likely need fresh impetus to take it out, while head towards 145.00.
As expectations for a bigger 1% move ease and sentiment remains cautious, USD/JPY faces pressure today and a test of 137.01 would not be surprising. However a deeper correction that would breach the EMA200 (134.60) and could pause the bullish momentum, appears hard at this stage.
From today's economic calendar US Retails Sales stand out, while stock markets in Japan will remain closed on Monday.
Senior Market Specialist
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
Retrieved 10 Dec 2022 https://www.federalreserve.gov/newsevents/speech/waller20220714a.htm