Lee Hardman, Currency Analyst at MUFG, notes that the US dollar is strengthening modestly ahead of today’s FOMC meeting to reflect the increasing likelihood of a more hawkish tone from the Fed relative to their last meeting in January.
Key Quotes
“Even the release yesterday of the softer than expected retail sales report for February which included a downward revision to growth in January is unlikely to prevent the Fed from signalling that they are likely to resume the rate hike cycle in the coming months. The report revealed that the three month average annualized rate of control retail sales slowed to just 1.1% in February signalling that the expected rebound in personal consumption in Q1 is likely to be more modest. Financial market instability has undermined consumer confidence earlier this year.
The recent improvement in financial market conditions should now support a pick-up in personal consumption growth in the coming months. The easing of financial conditions is likely to prompt the Fed to lower their projections for the Fed funds rate more modestly as well.
We still expect the Fed to signal that it expects to raise rates three more times this year and another three or four times next year as well. The outlook for economic growth has weakened only modestly. The next rate hike is most likely to be delivered in June but it is not inconceivable that it could be delivered as early as next month which should provide support for the US dollar.”
(Market News Provided by FXstreet)