Revenge of the Hawks

The Fed hawks have been swooped in to warn about many imagined inflation problems since the crises but they may finally have something real to worry about. The US dollar was the top performer on Tuesday while the Australian dollar lagged. Japanese trade data is up next.

In the span of four months, y/y inflation in the US has risen by a full percentage point. CPI hit 2.1% versus 2.0% expected in the May report. More importantly, the price gains were broad based and core CPI rose the most single 2011.

The composition of the Fed is growing more hawkish and the likes of Prosser and Fisher will be vocal ahead of Wednesday's decision. Previously the meeting lacked a theme but now traders will be on guard against inflationary worries.

Action tomorrow is extremely unlikely beside the regular taper but now any inflation comment or hawkish dot forecast will grab the spotlight.

You could see the nature of the FX reaction on Tuesday's market as the dollar climbed 30-40 pips.‎ Look for much more if the Fed emphasizes information.

The other central bank most worried about inflation is the BOE but the data was softer Tuesday and that caused a temporary dip in cable. The pair rebounded to test 1.70 again but was rebuffed. The bulls are getting anxious.

The market will now turn to Japan where trade balance numbers are due at 2350 GMT along with the BOJ minutes. Exports are expected down 1.3% y/y but the reports are unlikely to jar the market.