Some analysts believe tonight's US inflation data provides sufficient reason for the Fed to an interest rate hike.

The release of US inflation data on Tuesday, June 13th, stumbled the Dollar ahead of the Federal Open Market Committee (FOMC) meeting. The US Dollar Index (DXY) fell to a two-week low of 103.04, although it subsequently strengthened to 103.28 in the New York session.

USD Index (DXY)

The US Consumer Price Index (CPI) report showed growth of 0.1% in May 2023. The number was much weaker than the 0.4% increase in the previous period while missing the consensus estimate pegged at 0.2%. The annual inflation rate also fell from 4.9% to 4.0%, the lowest since March 2021.

Core goods price data grew as expected on both a monthly and annual basis. The monthly growth returned at 0.4%, as in March and April. Meanwhile, the annual inflation rate slowed from 5.5% to 5.3%.

Some Analysts believe that these numbers give a good reason for the Fed to postpone the rate hike. Market participants currently estimate a 95% chance for a scenario where the Fed keeps interest rates in the range of 5.00%-5.25% at tomorrow's FOMC meeting results announcement. The probability of a fixed rate at the July FOMC meeting has also increased slightly.

These considerations are fueling the US Dollar's decline tonight. However, it should be noted that the US inflation rate is still twice as high as the Fed's target. If there is a risk of inflation rising again soon, the Fed may lift rates beyond expectations or deliver more hawkish rhetoric. These surprises potentially trigger turmoil in the forex market.

"The numbers are probably enough to see the Fed keep rates on hold this month, as they have suggested," said Stuart Cole, Chief Macro Economist at Equiti Capital. "But against this is the fact the core monthly rate remained unchanged at 0.4%, a figure that is too high to be compatible with a 2% inflation target (from The Fed) and very much highlighted by the much more modest fall in the annual core inflation rate. In itself, you could easily see the FOMC being able to use this figure to justify another 25bps rise."