FOMC Minutes Moves Dollar Higher: Could we actually see a hike at the June meeting? US Inflation Surprises: Will The Dollar Move Higher Before June’s Meeting…? The April US inflation reading of +0.4% compared to the 0.3% expected. Sterling Snaps Back: Sterling has caught a bid this week. Can The Dollar Rally Continue…?
FOMC Minutes Moves Dollar Higher
19.05.2016 Could we actually see a hike at the June meeting? Well, yesterday’s FOMC Meeting Minutes say yes, yes we could! The FOMC meeting minutes which were released yesterday at 1900 (BST) suggest that the committee that is behind the US Federal Reserve think that an interest rate hike in June is entirely possible, if incoming data showed that the economy was improving. The old friend the “data dependent” line is back on the headlines! How much of this rhetoric is just to smooth out market expectations which are leaning far too much toward barely the one interest rate hike for 2016 is yet to be seen, but to me that’s all they are doing here. But while the recent economic data out of the US has been relatively positive, uncertainty from a global economic perspective still reigns supreme and leaves huge questions when you think about the Yellen rhetoric leading into the Christmas hike. Interestingly, Fed funds futures have re-priced from a 14% chance of a June hike yesterday, to a 30% chance today. That’s not small, and shows where savvy traders can profit from markets trying to front run expectations and getting too far out of whack with reality. Yields on US treasuries jumped and as we also highlighted yesterday, the S&P 500 continued to come under pressure as both fundamentals and technicals lined up on Indices. From a Forex trading perspective, the hawkish minutes however, did put a rocket under the US Dollar for the session. Most notably pushing USD/JPY back above the hugely significant 110.000 psychological level.
US Inflation Surprises: Will The Dollar Move Higher Before June’s Meeting…?
18.05.2016 Yesterday’s inflation report from the US really surprised analysts, and could potentially lift overall sentiment regarding a June hike. US CPI m/m came in at 0.4% vs. 0.3% expected, with Core CPI remaining steady at 0.2%. The April US inflation reading of +0.4% compared to the 0.3% expected, while simply just beating surveyed expectations, was actually also the fastest monthly increase in over three years! A huge contributing factor to the reading has been the recent oil price rally off its lows within a steep bullish channel, which began back in February. In some locations petrol prices have moved almost 9% higher since reaching the lows below $30 a barrel, seen back in January. This pick-up in the inflation reading has put the Fed back on notice for further rate hikes in 2016, and both Atlanta Fed President Lockhart and San Francisco Fed President Williams chimed into the conversation last night. Both were discussing the possibility of up to 3 rate hikes this year alone. I find this really interesting because after being so coy for so long, this didn’t seem like the ‘smoothest’ way to go about warning markets of their intentions heading forward. Something that to their credit, the Fed has actually been pretty good at in this cycle. “(June) certainly could be a meeting at which action could be taken.” – Williams “I think the incoming data have actually been quite good and reassuring in terms of policy decisions, so, in my view, June is a live meeting.” – Lockhart While futures market pricing has a June hike barely a possibility at all (just 14% is currently priced in and that was after a jump!), it is this sort of rhetoric that has traders talking up the possibility of the June FOMC meeting being in play. If markets are underpricing the change, this is where the trading opportunity will lie for Forex and Indices traders.
Sterling Snaps Back
17.05.2016 Sterling has caught a bid this week, pushing higher against most majors over the course of yesterday and this morning. The data coming out from the UK just keeps disappointing markets, however because we’ve had so much disappointing data the markets seem to be dismissing it. This morning’s CPI release was a perfect example of that. We were moving higher before the data release and managed to knock on the 1.4520 area. The data came out and although it was poor, coming in at 0.3% vs. 0.5% expected, markets shrugged off the selling and seem to be adding back to the bids. Markets can’t be bearish forever, even if data continually disappoints and for some reason I just feel that it’s sterling’s week to shine. Can we get back above that 1.47 level…?
Can The Dollar Rally Continue…?
16.05.2016 Over the last few weeks markets seem to have underestimated the possibility of another rate hike this year. Although most analysts and economists aren’t expecting any sort of change in monetary policy at the next Fed meeting in June, last week’s rally in the US dollar has shed some late on how many may have overshot the mark when it came to a 2016 rate hike being taken off the table. Oil’s recent gains should pick inflation up over the next few months and the strong retail sales figures released from the US last Friday suggest a move to a more bullish tone across dollar pairs. According to a Wall Street Journal Survey that looks at the divergence or difference in economist’s predictions against the market itself, for the first time since February a majority are not expecting to see a June hike. Although economists are catching up, the markets priced this in a few weeks back in the dollar weakness/commodity rally we saw. Now the survey shows 31% that still think it’s gonna happen, 21% that think there will be a July hike and 31% that are betting on a September hike. At this point the markets are pricing in a hike in either Q3 or Q4, and have since began to move back into the dollar bull camp due to the over bearishness we saw recently. If inflation increases like we think it will, oil continues to hold above $42 whilst increasing slightly and employment remains stable, with a continued increase in wages, then the Fed will have no excuse not to raise.
