Fed on course to resume rate hikes in coming months – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has remained on a firmer footing in the Asian trading session having rebounded strongly during this month. 

Key Quotes

“As a Bloomberg report highlights, the US dollar as measured by their own index is on track to rise in the month of May for the seventh consecutive year. The US dollar is still deriving support in the near-term from the strong signal from the Fed that it plans to resume gradual rate hikes in the coming months. It was a view backed by Fed Chair Yellen late last week when she stated that “probably in the coming months such a move would be appropriate”.

The more hawkish communication for the Fed has prompted short-term US yields to adjust higher over the past month rising back towards levels from the middle of March. The US dollar has similarly reversed just over half of the losses it sustained in the previous two months leaving some scope for it to strengthen further in the near- term if the Fed backs up its more hawkish words with action. For the Fed to resume rate hikes in the coming months it will still require incoming economic data to provide confirmation that US economy is picking up after a weak start to the year.

The release today of the latest personal spending report for April is expected to reveal that consumer spending made a strong start to the second quarter. The Fed will also be watching closely to see if core inflation pressures are continuing to firm as disinflation pressures from the sharp drop in the price of oil and stronger US dollar are beginning to ease. The US interest rate market still judges that the Fed is more likely to raise rates in July rather than at their next meeting in June.”