Fed Drama And The Dollar – 3 Opinions

The Fed minutes opened the option for a June rate hike and lifted the greenback across the board, with notable moves in EUR/USD,AUD/USD and USD/CAD. What’s next? Is a June hike a certainty? Here are 3 opinions:

Here is their view, courtesy of eFXnews:

USD Post-FOMC Minutes: Options Open – BofA Merrill

The April minutes of the Federal Open Market Committee (FOMC) revealed a greater willingness to consider a June rate hike than market pricing or recent consensus among economists would suggest. Indeed, “some” voting members thought that market pricing of a June rate hike “might be unduly low.” While “most” participants thought that a case for hiking in June could be made if their forecasts for improving 2Q growth, continued labor market strength, and progress on inflation were met, “several” worried that “incoming information might not provide sufficiently clear signals” in time.

The FOMC otherwise was divided on several issues, and the voters generally agreed that it would be “appropriate to leave their policy options open” and “maintain flexibility.” As we have noted before, rate hikes this summer remain a possibility, conditional on the outlook. However, our base case remains a patient Fed that next hikes in September.

FX: Fed expectations to continue supporting the USD, for now…

The Fed minutes echoed the tone of recent Fed speakers who have pushed back against dovish market pricing, arguing June or July hikes remain likely given recent positive economic and global market developments. Alongside a better tone to US data in recent days and more neutral dollar positioning, a continued increase in the number of market-implied hikes has room to further support the USD. However, given the Fed’s still data-dependent stance and how far market-implied expectations have come, the USD impact could diminish unless US data momentum picks up meaningfully, particularly if increased Fed expectations raise market concerns about China.