The FOMC meeting outcome is widely expected to hike by 25bps to 1.75%-2.00% in June 12-13 meeting. June Fed hike will leave RBNZ behind with 1.75%. Last month, the Bank held the OCR at 1.75 percent and retained the view that monetary policy would remain accommodative for a considerable period.
RBA at its meeting last week, leave the cash rate unchanged at 1.50 percent.
Will FOMC projections signal four hikes?
As we pointed in our earlier article, we remain to our forecast, “expect four Fed hikes in 2018, but more confirmation will be available at the June meeting”. The dollar bullishness cast on the clues regarding further tightening later this year. Market participants are mainly watching on the dot plots (projections) which are available in the Summary of Economic Projections (SEP). After the appointment of new Chair Powell, the market is anticipating a hawkish bias.
Since March the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Due to higher oil price prices, we expect the committee could upgrade the inflation forecast in the coming year.
May FOMC statement revealed, “Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low.” Incase of lowering the unemployment rate, in the long run, could add fuel to the hawks.
We have two scenarios for FOMC: The Fed forward’s guidance language is the key
Hawkish: Upgrade economic, and inflation forecast are indicating more scope to rate hikes further. Currently, the street is expecting a hike in June and again in September. We believe December hike clue could be the trigger for the dollar bulls. A modest hawkish reaction could expect if four hikes projected in 2018. If dot plots are moved higher in 2019-2020, and the longer term could read as hawkish. Lack of an extra mile factor pressured the dollar bulls. We expect the Fed will erase the sentence “The stance of monetary policy remains accommodative.”
Neutral: If the dot-plot chart lacks an uptick in 2018 and no forward guidance means “slow and steady.” No macro outlook change could divide the Fed watchers (Dovish). Since March the policy bias remains unchanged. The “bitmap” median forecast shows that the Fed will raise interest rates three times in 2018.
The tradable dollar index (KTM: USDX) trading range likely to remain between 94.40-93.20 levels. Before retraced to 93.18 (June 07 low) the index traced out a double top at 95.00 between Nov 2017 and May 2018. The near-term trend remains in a tight range whereas a move above 95.00 needed to forecast 95.40 and 96.25 levels in the medium term. Flip side breaks below 93.00 could open further retracement to 92.40 levels.
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