Fed look ahead: is June too soon?

With markets increasingly adjusting to the idea that we could see a rate rise this summer, Joshua Mahony looks into the current state of play ahead of Friday’s speech from Fed chair, Janet Yellen.

Federal Reserve building
Source: Bloomberg

Last week’s FOMC minutes sparked a sharp appreciation in the dollar, which broke to a 50-day intraday high. With rate hike expectations on the rise, the June meeting appears to be back on the table as a possibility. With this in mind, this week’s plethora of Federal Reserve speeches, culminating in an appearance by Janet Yellen herself, will go a long way to adjusting market expectations. Where do we stand and what should we expect in the coming weeks?

Hawkish tones
One of the most striking things about recent comments from Fed members has been just how hawkish they are, despite somewhat underwhelming payrolls numbers over recent months. Minutes from the April FOMC meeting highlighted a clear willingness to act within the committee given improvements across the economy. The removal of reference to external threats was notable and it is evident there is a push to get another hike across the line.

However, probably more important to come out of the minutes was the fact the committee felt the need to realign market expectations, which it felt was disproportionately geared towards inaction at the forthcoming meetings. This is exactly what we have seen recently and with each speaker’s public appearance, there is a growing willingness of the markets to acknowledge the credibility of a rate rise.

Friday is likely to be an extension of this, where Janet Yellen reiterates the committee is data dependent, with many of the pieces in place for a rate hike. The SNB demonstrated the impact an unexpected central bank policy shift can have.

There is a good chance the Fed is simply ensuring any potential hike does not happen due to a major shock to the system should it occur.

We have heard time and time again the rate decisions are ‘data dependent’, which according to some members has largely been met. Let’s take a look at some of the key data points the Fed will be following.

Firstly, market expectations reflect a rise in rate hike expectations over recent weeks, with the 4% expectation of a June rise last Monday, to the 34% today. Janet Yellen will know this and her comments will likely shift these numbers even more.

From an inflation point of view, the rise over recent months has brought about an environment which is significantly more stable for the committee to act within. With crude back above the December levels and having created a new seven-month high, it is clear this could bring yet another bout of inflation next month.

Looking at the jobs markets, it is clear payrolls have tapered off since the last hike in December, with the 295 and 280 readings in the lead up to that meeting far outweighing the 208 and 160 in the last two jobs reports. However, with this number often subject to significant revisions, the June numbers will have a big impact upon the committee sentiment.

The main benefactor of this recent hawkish shift is undoubtedly the greenback, with the Dollar Basket rising from a 15-month low to gain 4% in the subsequent three weeks. The most important thing on the daily chart is the fact we have now broken through the crucial 95.22 resistance level, negating the creation of lower highs over the past five months.

While the fact markets typically do not move in a straight line means we are likely to see a pullback before long, there seems to be a lot more left in the tank for this dollar rally. This index is disproportionately affected by the movements in EUR/USD and thus gains for the dollar index are generally driven by EUR/USD weakness.

Forthcoming meetings
It is likely the recent hawkishness at the Fed is more a reflection the members wanted to adjust expectations rather than anything. June certainly remains ‘live’ as a possibility and the result of next week’s jobs report will be crucial to determine the likeliness of it happening.

Other than that, the July meeting seems more likely from a timing point of view, but given the lack of a press conference, many believe it may be pushed back to September.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen. 79% van de retailbeleggers lijdt verlies op de handel in CFD’s met deze aanbieder.
Het is belangrijk dat u goed begrijpt hoe CFD's werken en dat u nagaat of u zich het hoge risico op verlies kunt permitteren.
CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen.