Fed to Retain Cautious Stance to Further Tightening - MUFG
Lee Hardman, Currency Analyst at MUFG, expects the Fed to retain a
cautious stance towards further monetary tightening at tonight’s FOMC
“The Fed may acknowledge that downside risks from global and financial market developments have eased recently and sound less dovish than in March. However, we doubt that the Fed will be confident to signal yet that it is considering raising rates as early as the their next meeting in June. As such we do not expect the Fed to judge that the risks are now balanced/more balanced.
The weak start to the year for the US economy will likely keep the Fed cautious about resuming rate hikes in the near-term. The release yesterday of the latest durable goods report provided further evidence that capital investment was weak in Q1 although likely dampened by the early Easter.
As the US was faced with a drag from net trade and an inventory correction as well it appears likely that the economy struggled to expand in Q1. The market already appears to be looking ahead and expecting growth to rebound in the coming quarters as US yields have been ticking higher after bottoming in February.
The strength of the economic rebound in the coming quarters will be more important in determining whether the Fed resumes rate hikes later this year which would offer more support for the US dollar. On that front it is encouraging that leading indicators are tentatively improving as evident by the services PMI which increased for the second consecutive month to 52.1 in April.”