Can the Fed raise the interest rate despite the steady tame inflation pressure in US?

[walid]

• We have seen this week the release of June PCE which has shown rising yearly by only 0.3%, after rising by 0.2% in May. These rates are obviously away from the Fed's 2% inflation target over the medium term.
• In the recent meeting of the FOMC, the committee members have signaled that they look forward for watching evidence of inflation rising towards that target which has not been reached since March 2012.
• Since the beginning of this year US yearly PCE has managed to stand close to zero mainly because of the significant slide of energy prices which started by the beginning of the second half of last year and continued in the first quarter of this year by stronger severe way before finding support last March can be in check in the coming period by God's will with coming up oil offers from Iran and oil productions from OPEC exceeding its 30m daily limits reaching 32.01m in July.
• While the concerns around the recovery in EU is still continued and also the uncertainty about the Chinese demand putting pressure on the commodities prices generally.
• The Fed's Chief Yellen has highlighted in her semiannual testimonies that there is to be gradual hiking of the interest rate otherwise there can be need for raising by a fast pace later and that has been read as a hint of sooner than later beginning of raising rates
• The last meeting of the FOMC has shown appreciation of the housing market improving, confidence in the US labor market recovery and also trust in having growth rebounding in US, after the first quarter annualized shrinking by 0.2% which has been revised later to growth by 0.6% with the release of Q2 GDP which has expanded by 2.3%.
• The equities markets and the greenback reacted positively to that unexpected growth of the first quarter in US and now, the investors are positioning themselves for meeting good jobs data later this week with the release of July US labor report by the end of this week which can be another sign on the road for normalizing the monetary policy in US.
• The Fed is surely taking into its account the low inflation pressure currently which has resulted from the low oil prices but later in first quarter of next year this situation can be different on elimination of the oil prices slide impact.
• When we exclude the food and energy figures looking into the core figure, we can see that PCE rose again by 1.3% y/y in June like May.
June US CPI came also previously to show yearly rising by only 0.1% following no change in May but with excluding the food and energy, we can see that the rate rose by 1.8% after 1.7% in May.
• The gap between the broad inflation figures and the core figures can get tighter within the first quarter of next year, as the oil prices could find support by the end of the first quarter of this year.
• This is surely well-known to the Fed but that perspective is hard to be materialized, if we are not to have deeper slide of the oil prices or higher greenback appreciation can push the import prices down further driving the inflation outlook down
• The Fed has chosen to refrain from providing a new forward guidance last meeting on Jul. 29 to the markets to keep their pricing near 50% chance of raising rate next Sep. 17 meeting giving further leeway to the new coming data to direct the interest rate outlook.
• This Fed's choice halted the greenback progress, after it has been underpinned by Yellen's comments which sent USD up across the broad weighing down on the Gold which has been hit from another side by lower geopolitical concerns, after the Iranian deal which lowered also the prices of the energy prices putting pressure on the Gold.
• While the Greek deal was driving back the investors out of the safe haven positions with lower worries about facing financial instability in EU, as the worst of the crisis looked behind at least at this stage of the Greek crisis which has not leaded to Grexit yet.
• The Fed can start tightening taking this low inflation level as a reserve can help it later to halt hiking in the case of facing economic slowdown, as there is no high inflation pressure on it to raise rates.
• Technically, XAUUSD can continue to be exposed to further loses, stop losses orders and increasing downside momentum, after breaking 1132 which could cap its falling on Nov. 7 to prop it up to $1307 whereas the gold formed another lower high on last Jan. 22.
• The gold is exposed to forming another downside wave, after ending consolidation above $1132 which was the lowest level since the falling from its all times high at $1921 which has been recorded in September 2011.
• The gold has also fixed its oversold stance over the short term charts and that can make it exposed to another downside impulsive wave can drop $1073.95 and lead to further slide, while the correction is still limited below $1110, after reaching $1173.95.
• $1000 psychological level can be initial target of the sellers, while the way up is still in need for more reasons to take place, as the containing power is still struggling suggesting facing forming lower highs probabilities.


Have a good day
Kind Regards
FX Market Strategist
Walid Salah El Din
Mob: +20 12 2465 9143
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