FXStreet (Barcelona) – Derek Halpenny, European Head of GMR at Bank of Tokyo-Mitsubishi UFJ, believes that the recent rhetoric from the Fed members and the key June FOMC Meeting ahead is holding back the dollar as markets adopt a cautious stance.
Key Quotes
“This upcoming FOMC meeting on 16th-17th June is probably the key factor that is currently holding the dollar back. Market participants, correctly, have taken on board recent rhetoric that seems to point to continued caution over the extent of economic recovery. Governor Tarullo spoke on 4th June, stating that the US economy had lost some momentum. Governor Brainard also suggested that soft economic data meant questions needed to asked about the recovery. Vice Chairman Fischer also expressed some concerns over growth. So there has been enough in recent rhetoric to leave market participants cautious over positioning for a greater degree of tightening.”
“But we still believe that’s what is likely to materialise. Even if the DOT projection for 2015 is lowered, Chair Yellen may well signal that first rate increase will come sooner than year-end given the strength of recent data. The current DOTS profile (0.67% at end-2015 and 1.88% at end-2016) would already be the most timid tightening cycle in Fed history – the scope for lowering that profile further is very limited.”
“Of course, there is also little need given the scale of upturn in the economic data over the last few weeks. In particular the upturn in wage growth can’t be ignored. The NFP data already confirmed a pick-up, which was consistent with the ECI wages and salaries data. The Wall Street Journal also reported this week the data on employer costs for employee composition which weights wage increases based on sectors that are growing more strongly – on that measure wages and salaries jumped 4.2%. Everywhere you look there is building evidence of strengthening wage growth.”
“So while we can understand the lack of US dollar strength ahead of the key FOMC meeting next week, we are encouraged by the notable pick-up in growth and in labour market and wage indicators which will help underpin US dollar demand further ahead.”
(Market News Provided by FXstreet)