All eyes on the US ahead of inflation and FOMC announcements

• European markets on the rise after uninspiring UK data dump
• US CPI expected to highlight struggle in reaching 2% this year
• FOMC meeting to see focus on Powell testimony and projections

European markets are on the rise in early trade, with a batch of concerning UK data helping to improve the prospects of a September rate cut from the Bank of England. April proved to be less than convincing from an economic perspective in the UK, with the country flatlining amid contraction in construction, manufacturing, and industrial output. While many will point towards unfavourable weather conditions as a cause for lower economic activity, the somewhat uninspiring conditions seen since signal the potential for more for more of the same in May and June. Thankfully, the strength of the services sector remains key in driving UK growth, with the services PMI for May providing a welcome mix of healthy activity growth and easing price pressures.

Today marks the peak of the week for potential market volatility, with the US CPI inflation gauge providing the precursor to the FOMC interest rate decision and economic forecasts later in the day. The recent declines seen in energy prices have helped lessen expectations for the monthly headline CPI figure, with the 0.1% reading being predicted by many helping to keep the annual gauge steady at 3.4%. Nonetheless, with core CPI looking likely to begin flatlining after a protracted decline, today’s report looks to highlight the fact that US inflation could easily remain in the mid-threes for much of this year. If the Federal Reserve are to cut rates in the coming months, they will have to do so against a backdrop of flat or rising inflation well above their 2% target.

Jerome Powell’s testimony and the economic projection will provide the backbone of this FOMC meeting, with markets keeping a close eye on any hint that September could come to soon for a rate cut. With US inflation expected to remain well above target throughout the remainder of this year, markets expectations that the Fed will cut rates twice revolve around the notion that alternate factors such as an economic slowdown or political concerns will force Powell’s hand. This meeting will bring a fresh dot plot, which will lay out the outlook for rates over the remainder of the year. While the March dot plot laid out an expectation that we could see three cuts this year, there is a high likeliness that we see that figure shift down towards two or even just one cut by year end.