Facts:
- Core PCE inflation in the U.S. rose above consensus in May (2.7% m/m; forecast: 2.6%; previous: 2.5%)
- In his recent testimony before the Senate, Fed Chair Jerome Powell stated that “it is reasonable to expect inflationary pressure from tariffs”
- Seven members of the FOMC project no rate cuts in the U.S. for 2025
Recommendation:
- Short position (sell) on TNOTE at market price
- Target price: 110.95 (Take Profit 1; TP1), 110.50 (Take Profit 2; TP2)
- Stop Loss (SL): 112.5
Source: xStation5
Opinion
The recent rise in TNOTE prices (consequently: the decline in U.S. bond yields) was driven by the first clearly dovish comments from members of the Federal Reserve, including Michelle Bowman’s statement expressing support for a rate cut as early as July. The bond market responded enthusiastically to these signs of potential monetary easing, overlooking the fact that 7 out of 12 FOMC members – according to the latest dot plot – currently rule out any rate cuts in 2025.
Another argument supporting higher interest rates is today’s reading of the PCE index – the Fed’s preferred measure of inflation. The core PCE rose above expectations to 2.7%, indicating persistent challenges in bringing inflation down to target. Uncertainty for the coming months is further amplified by tariff-related policy developments and the unresolved outcome of bilateral negotiations regarding retaliatory tariffs.
Given the above, U.S. monetary policy is expected to remain cautious in the near term, which supports the case for a correction in the recent TNOTE rally. A potential risk to this outlook, however, comes from upcoming U.S. labor market data scheduled for next Thursday and Friday. The latest ADP and NFP reports have sent mixed signals regarding labor market conditions, but weak readings from both could realistically revive expectations for rate cuts in the U.S.
Methodology
This recommendation is based on a technical analysis of the TNOTE futures chart and a fundamental assessment of U.S. monetary policy. The direction of the recommendation reflects the expected impact of macroeconomic data on the Federal Reserve’s future rate decisions. TP1 and SL levels were determined based on price action – TP1 corresponds to a resistance level just below the exponential moving averages, while SL was set at the next closest resistance. The risk-reward ratio is 1:1.
