FXStreet (Barcelona) – Strategists at BofA-Merrill Lynch, comment on the USD outlook and investor concerns ahead of the June FOMC Meeting and the expected September rate hike.
Key Quotes
“The dollar will be supported if the June FOMC statement communicates a strong data dependent stance (as before) and the 2015 and 2016 dot plots still imply two and four hikes, respectively, as we expect. With the market only pricing a 50% chance of a second hike this year, a further rise in front-end yields will support the USD through a flatter curve, as it has historically.”
“The dollar’s inability to rally sustainably despite building evidence for a September suggests (1) investors remain uncertain about the strength of US growth (and how the Fed will respond), (2) positioning is still long USD, and (3) external factors like the moves in German sovereign debt and the situation in Greece are dominating improving US fundamentals. Together this suggests the USD could continue to consolidate near current levels.”
“We continue to expect Fed policy to support the USD as the year progresses. But the pace of hikes thereafter will be a key determinant in the next leg of USD strength, as well as the ability of the economy to weather such policy-induced USD strength. Risks could be on the downside here.”
“First, Governor Brainard noted recently that not only had the impact of USD strength been larger than many anticipated, but the impact could continue for a few years, slowing the pace of normalization. Second, a period of heightened volatility could also limit the ability of the USD to benefit as hikes commence. Together, we believe these two issues are important signposts to gauge the sustainability of USD strength as the Fed hikes.”
(Market News Provided by FXstreet)