USD rebound continues heading into FOMC minutes - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has continued to strengthen in the Asian trading session extending its rebound from early this month.

Key Quotes

“Renewed upward momentum for the US dollar was reinforced yesterday by the release of the stronger than expected US CPI report for April. The report provided further evidence that inflation pressures are continuing to firm in the US. Headline inflation accelerated more sharply than expected by 0.4% in April lifting the annual rate to 1.1%. The annual rate of headline inflation is likely to accelerate sharply back towards the Fed’s goal in the second half of this year as the disinflationary impact from lower energy prices continues to fade.

Underlying inflation pressures are firming as well as evident by inflation in the services sector excluding energy services which is currently running at an annual rate of 3.0% in April. The report should provide reassurance to the Fed that inflation is likely to rise towards their goal supporting the resumption of gradual rate hikes this year. A rebound in economic growth in Q2 which appears likely after solid consumption growth in April should also support building Fed rate hike expectations.

It was a view shared yesterday by Atlanta Fed President Lockhart, San Francisco Fed President Williams, and Dallas Fed President Kaplan. Atlanta Fed President Lockhart stated that “currently my assumption is two, possibly three” rate hikes this year. San Francisco Fed President Williams stated that “gradual means two to three rate increases this year”. Both Fed Presidents also expressed their views that markets are not giving enough weight to the possibility of the Fed resuming rate hikes at their upcoming meeting in June or July.

San Francisco Fed President Williams added that “the incoming data have actually been quite good and reassuring”. Their views were shared as well by Dallas Fed President Kaplan who stated that “whether that’s the June or July meeting I don’t know, but we’re making enough progress where I think it’s appropriate for me to be advocating removing some level of accommodation”. None of the three Fed Presidents are voting FOMC members this year which has dampened the impact of their hawkish comments.

The release today of the latest FOMC minutes from their meeting in April will be scrutinised for any further insight into how close the Fed is to resuming rate hikes. The minutes are likely to be less dovish signalling less concern over downside risks from global and financial market developments. It will be interesting to see if there is discussion over Brexit risks ahead of the referendum which we believe will prompt the Fed to refrain from resuming rate hikes as early as in June.”