Back to monitoring global developments
As was widely expected, the Federal Open Market Committee (FOMC) did not change policy at its April meeting. However, its updated statement nudged the Fed slightly in a less dovish direction, leaving the door open for a June hike in our view. Notably the FOMC stopped calling out global risks explicitly, and now is closely monitoring global factors as well as inflation indicators. Otherwise the Fed gave no explicit signals about upcoming meetings; the data-dependent policy language has remained unchanged since December.
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We reiterate our expectation that conditions will warrant another 25 basis point (bp) rate hike this summer: June remains our base case. But if financial conditions tighten appreciably ahead of the UK referendum, the FOMC may tactically delay to July
FX: Baby stepping to a hike
The exclusion of an explicit mention of global economic and financial risks initially saw the USD rally. But this move quickly reversed as the market realized the hawkish signal was offset by the Committee’s reversion to the January language that it will continue to monitor global economic and financial developments. These contrasting edits left the USD little changed on net. The statement overall is still a modest USD positive to the extent the FOMC is less concerned with risks from abroad, leaving the door open to the June hike we expect. This pushes against the market narrative of a Fed that doesn’t want to hike again. But the Committee’s continued monitoring of global risks suggests conditions will have to remain relatively benign in the run-up to June, and Fed communication will have to turn more optimistic for the dollar to rally more broadly.
With speculative investors net short the USD now for the first time since May 2014 and the USD off 5% from its 2016 highs, a more positive Fed tone would support the USD.
