US Dollar Aims Higher as Fed Lays the Groundwork for June Rate Hike

Talking Points:

• US Dollar continues to rise as markets undo half of post-FOMC drop
• March rate forecast update, subsequent Fed-speak hint at new strategy
• Comments from St. Louis Fed’s Bullard may add to case for June hike

The US Dollar outperformed in overnight trade, rising to its highest in four days against its major counterparts and erasing half of the decline sustained in the wake of last week’s Federal Reserve policy announcement. The rate-setting FOMC committee downgraded its projected rate hike path to imply two 25bps increases in 2016, down from four envisioned in December.

The greenback launched a recovery this week, with prices putting in the first three-day winning streak in a month. The move has played out against a backdrop of hawkish rhetoric from central bank officials, all of whom sounded a relatively upbeat tone on domestic prospects and cited external forces including the slowdown in China as the rationale for opting against a hike this month.

Tactically speaking, Janet Yellen and company may have realized that the gap between official and priced-in policy bets in December set the stage for subsequent risk aversion that undermined tightening in March. Lowering the outlook to match investors’ pre-“liftoff” view and talking up progress on the mandate while blaming outside headwinds may imply a new strategy aimed at realignment. This will presumably set the stage for a smoother hike in June.

The markets’ 2016 policy outlook implied in Fed Funds futures edged higher alongside the benchmark currency this week, hinting that the new approach is starting to have the desired effect. More of the same may be on tap today as scheduled remarks from St. Louis Fed President James Bullard – a voting member of this year’s FOMC contingent – cross the wires.

What are DailyFX analysts expecting from the US Dollar in 2016? Find out here !

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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