US: More rate hike rhetoric ahead of Fed Chair Yellen’s speech – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the recent growing chorus of Fed speakers signalling that the Fed is moving closer to resuming rate hikes continued to build yesterday.

Key Quotes

“Dallas Fed President Kaplan stated in an interview that the “case is strengthening” for another rate hike. He noted that “in the not-too-distant future, if the facts continue to confirm” that the Fed is headed in the direction of its employment and inflation goals, “we’re moving toward being able to take another step”. It follows on from comments earlier this week from Fed Vice Chair Fischer that the Fed is close to its targets.

If Chair Yellen provides an update on the outlook for Fed policy in today’s speech, we expect her to provide a similar signal that a rate hike remains likely this year but she is unlikely to commit at this stage to hike in September. The exact timing of the next rate hike remains data dependent.

The initial market reaction would likely be one of relief if there is no explicit signal over a September hike although it won’t be ruled out either which should help limit US dollar weakness. It would likely take Chair Yellen to discuss in more detail about potentially raising the inflation target in the future to generate a larger US dollar decline. In contrast if Fed Chair Yellen acts to guide the market towards a September rate hike, the US dollar could strengthen materially.”