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Just last week, the Fed funds futures markets said that there is almost no possibility the Fed would take action at midyear. According to the CME Group 30-Day Fed Fund futures prices, the odds are currently at 30%. A bunch of solid US data, hawkish Federal Reserve (Fed) officials’ comments and the FOMC minutes for the April meeting have changed that perception.
The minutes essentially warned sceptical investors that an increase in rate is still on the cards in June if the economy keeps improving. Speeches from the US central bank policymakers alluded to the same effect.
As the US labour market remains resilient, the next important data to keep a lookout for is inflation. And the PCE core index is due on 31 May. Needless to say, a strong number will see expectations rocket up.
In the meantime, however, traders will need to be satisfied by other US economic data in the coming week. The key economic reports are durable goods orders, new home purchases, as well as the second estimate of Q1 GDP.
USD gains may slow
The dollar index has rebounded nearly 3% since the start of May. Without stronger proof that the conditions are sufficient for the Fed to raise interest rates, investors might be reluctant to add fresh USD longs. They also have to consider whether ECB and BOJ will contribute further to USD momentum by pursuing more expansionary monetary policies. For the time being, risk appetite is limited, until we achieve more clarity.
In conjunction, the outcome of the discussion at the G7 meeting of finance ministers and central bank governors may also shape the thinking around monetary policy efficacy. The heart of the matter is whether the major countries should continue to rely on central banks to stimulate growth with ultra-accommodative policies. This will no doubt have an impact on global currencies and risk assets. The G7 leaders summit will begin on 26 May.
In Asia, it will be relative light on the data docket. Consumer sentiment and industrial profits for China could be of interest, while in Japan, trade and inflation data for April will be published. In Singapore, April CPI numbers and final estimate of Q1 GDP are due.
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