Final Michigan data shows that the Fed panicked?

5:14 PM June 24, 2022

Fed Chair Powell said during his semi-annual testimony in Congress this week that there were 2 factors that encouraged FOMC to deliver a 75 basis point rate hike instead of a 50 basis point one. Those factors were a recent CPI reading for May as well as University of Michigan data for June, more precisely inflation expectations component of UoM data. According to preliminary UoM reading, 5-year inflation expectations jumped from 3.0% to 3.3%, what forced the Fed to act in order not to allow expectations to de-anchor. However, a final reading that was released today at 3:00 pm BST showed a revision from 3.3 to 3.1%. If that was the initial reading, there is a high chance that Fed would not have decided for a 75 basis point move. Preliminary UoM reading also showed 1-year inflation expectations moving from 5.3 to 5.4% but final data showed it staying unchanged at 5.3%. However, the long-term expectations (5-year) are more of a focus for the Fed.

It looks like markets are also noticing that the Fed may have been too quick to act on preliminary Michigan data. Wall Street jumped following the final Michigan data release while the US dollar pulled back. However, it should be noted that a very strong new home sales reading was released at 3:00 pm BST as well, and it may have also played a role in observed market moves. That reading showed a 696k increase instead of an expected 585k.

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EURUSD caught a bid as US dollar pulled back in response to Michigan data revision (orange circle). Main currency pair is approaching the 1.0590 resistance zone. Source: xStation5

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