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US Dollar May Rise as Fed Hints at Sooner-Than-Expected Rate Hike

US Dollar May Rise as Fed Hints at Sooner-Than-Expected Rate Hike

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • US Dollar, Yen May Rise as FOMC Hints at Sooner-Than-Expected Rate Hike
  • Pound at Risk on BOE Meeting Minutes But Follow-Through May Disappoint
  • See Economic Releases Directly on Your Charts with the DailyFX News App

The Federal Reserve monetary policy announcement is firmly in focus. June’s sit-down will feature the expanded quarterly meeting format, with the policy statement accompanied by an updated set of economic forecasts from the FOMC rate-setting committee and a press conference with Chair Janet Yellen. Needless to say, investors will be acutely focused on what the outcome will mean for evolving speculation about the timing of the first post-QE interest rate hike. As it stands, Fed Funds futures price in the onset of tightening in October.

Rate hike expectations waned in the first half of 2015after a growth slump in the first quarter fueled bets that the Fed will delay stimulus withdrawal. This narrative is remarkably similar to 2014. Then too, investors thought the FOMC will delay or slow the pace of “tapering” QE asset purchases after a weak start to the year. For their part, officials argued that the slowdown was transitory, optingto stay the course and deliver the end of QE3 on schedule. Fed rhetoric in response to this year’s hiccup has been nearly identical, underscoring similarities between current events and those of 12 months ago.

With this in mind, it seems plausible that the FOMC will proceed with policy normalization along the same timeline that was intended prior to the first-quarter misstep, mirroring 2014. Based on early-2015 Fed commentary and market pricing, that implies a rate hike in July. If this is the case, the FOMC may use the extensive amount of information on offer at the June meeting to lay the foundation for tightening at the subsequent sit-down.

Clues to this effect may force a hawkish shift in priced-in expectations, boosting the US Dollar. They may also sink risk appetite, which has enjoyed a significant boost from the Fed’s ultra-easy stance in the aftermath of the 2008-09 financial crisis. This may translate into outsized losses for sentiment-geared currencies such as the Australian, Canadian and New Zealand Dollars. If carry trade liquidation accompanies risk aversion, a Yen advance may also materialize.

The publication of minutes from June’s Bank of England policy meeting headlines the docket in European trading hours. The British Pound may come under pressure after the release if the document contains rhetoric highlighting the disparity between the BOE’s nod toward a mid-2016 rate hike telegraphed in the latest quarterly Inflation Report and the markets’ priced-in bets for tightening in the first quarter. Follow-through may be limited however as traders wait for the FOMC announcement to pass before committing to a direction.


Asia Session

22:45NZDBoP Current Account Balance (1Q)0.662B0.282B-3.170B
22:45NZDCurrent Account GDP Ratio YTD (1Q)-3.6%-3.8%-3.3%
23:50JPYTrade Balance (¥) (MAY)-216.0B-258.8B-55.8B
23:50JPYTrade Balance Adjusted (¥) (MAY)-182.5B-184.0B-239.9B
23:50JPYExports (YoY) (MAY)2.4%3.0%8.0%
23:50JPYImports (YoY) (MAY)-8.7%-7.5%-4.2%
00:30AUDWestpac Leading Index (MoM) (MAY)-0.1%-0.0%
06:00JPYMachine Tool Orders (YoY) (MAY F)--15.0%

European Session

08:30GBPClaimant Count Rate (MAY)2.2%2.3%Medium
08:30GBPJobless Claims Change (MAY)-13.8K-6.5KMedium
08:30GBPAverage Weekly Earnings (3M/YoY) (APR)2.1%1.9%Medium
08:30GBPWeekly Earnings ex Bonus (3M/YoY) (APR)2.5%2.2%Medium
08:30GBPILO Unemployment Rate (3Mths) (APR)5.5%5.5%Medium
08:30GBPEmployment Change (3M/3M) (APR)190K202KLow
08:30GBPBank of England Minutes--High
09:00EUREurozone Construction Output (MoM) (APR)-0.8%Low
09:00EUREurozone Construction Output (YoY) (APR)--2.7%Low
09:00CHFCredit Suisse ZEW Survey Expectations (JUN)--0.1Low
09:00EUREurozone CPI (MoM) (MAY)0.2%0.2%Medium
09:00EUREurozone CPI (YoY) (MAY F)0.3%0.3%Medium
09:00EUREurozone CPI Core (YoY) (MAY F)0.9%0.9%Medium

Critical Levels

CCYSupp 3Supp 2Supp 1Pivot PointRes 1Res 2Res 3

--- Written by Ilya Spivak, Currency Strategist for

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