US: Fed officials sticking to more hawkish line – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has continued strengthen in the Asian trading session with gains most evident against emerging market and commodity related currencies.

Key Quotes

“The Asian dollar index has now fully reversed its gains for the year although it still remains around 1.8% higher than the cyclical low from January. Fed speakers from yesterday including St Louis Fed President Bullard (voter this year), San Francisco Fed President Williams (non-voter), and Philadelphia Fed President Harker (non-voter) remained consistent with the recent signal from the Fed that it plans to soon resume gradual rate hikes which is offering more support for the US dollar in the near-term.

St Louis Fed President Bullard further encouraged speculation that the Fed would be prepared to raise rates as early as at their next meeting in June ahead of the upcoming EU referendum in the UK. He stated that even if the UK decides to leave the EU, the “next day nothing happens” and the country will enter into departure negotiations bound to go “very slowly”. “I also see the probability of an exit vote as having fallen somewhat recently…because of these factors I feel it won’t influence the FOMC’s decision”.

We would expect Brexit if it occurs to have more of a negative impact on the US economy through tightening US financial conditions which will dampen the need for the Fed to raise rates. As a result, we continue to expect the Fed to display more caution and resume rates in July if the UK votes to remain in the EU. It is a view shared by the market which is attaching only around a 1 in 3 probability of a rate hike in June but at around 50:50 for a hike in July.

However, we are less confident now that the Fed will wait until July in light of recent Fed rhetoric. Philly Fed President Harker added to the recent hawkish rhetoric form the Fed stating that a June rate would be “appropriate” if the incoming data is consistent with his view of the strength in the US economy. He also stated that “I can easily see the possibility of two or three rate hikes over the remainder of the year”.”