Waller Makes it "a Good Night" for USD

Above: File image of Governor Waller. Image: Federal Reserve.

The Dollar has firmed after a key member of the U.S. Federal Reserve said recent U.S. inflation data prints have disappointed, further cooling market expectations for imminent interest rate cuts.

"It has been a good night for the dollar. One of the Fed's most influential voices, Christopher Waller, delivered a mildly hawkish speech," says Chris Turner, Head of FX Research at ING Bank.

The Pound to Dollar exchange rate is a quarter of a per cent lower on the day at 1.2610 after Federal Reserve FOMC member Christopher Waller said there was "no rush" to cut interest rates owing to recent disappointing inflation data.

Turner explained that the speech affirmed a market view that the Fed would be arriving late to the rate cut party.

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"There is no rush to cut the policy rate" right now, Waller said in a speech at an Economic Club of New York gathering. Recent data "tells me that it is prudent to hold this rate at its current restrictive stance perhaps for longer than previously thought to help keep inflation on a sustainable trajectory toward 2%."

He added, "it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data."

"The US dollar has seen slight support, especially after some hawkish Fed comments as markets await tomorrow's U.S. inflation data," says Hann-Ju Ho, an analyst at Lloyds Bank.

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Friday sees the release of the Fed's favoured inflation gauge, PCE inflation, which could further bolster Waller's argument that interest rates must remain at current levels for longer.

The Dollar is 2024's best-performing currency owing to a significant reduction in expectations for interest rate cuts this year thanks to ongoing U.S. economic strength.

Waller says he expects inflation will ultimately fall, and it will become appropriate for the Fed "to begin reducing the target range for the federal funds rate this year."

He said it could take a few months of easing inflation data to gain that confidence, but until then, a strong economy gives the Fed space to take stock of how the economy is performing.

Although markets have lowered expectations for a June rate hike at the Fed, Steve Englander, an economist at Standard Chartered, says June is still live, and the first cut could even come in May.

He explains in a recent research note that Fed Chair Jerome Powell may oversee rate cuts even if there are dissenters on the Federal Open Market Committee (FOMC).

"12 June FOMC is the most likely date for a cut, but we see a slim chance that 1 May will be live," says Englander.

Up until now, the Powell-led Federal Reserve has been known for its cautious approach. It prefers unanimity over quick decisions from a divided FOMC.

"We now think Fed Chair Powell will accept dissents in order to push through timely cuts," says Englander.

This suggests that the Fed can proceed with rate cuts even if the likes of Waller and other hawks disagree, particularly if upcoming inflation numbers show a continued grind lower.

If this comes to pass, the pendulum will swing back towards U.S. Dollar weakness.