US Dollar to Continue "March Higher" as Markets now 94% Certain on June Interest Rate Rise

US Federal Reserve prompts the Dollar to move higher

The US Dollar has been one of the better-performing global currencies over the past 24 hours after money markets raced to price in a 93% chance of an interest rate hike at the Federal Reserve in June.

The sudden repricing of the move came in the wake of the May Federal Reserve Open Markets Committee (FOMC) meeting held on May 3.

Markets were only pricing in a 69% chance of a hike ahead of the event.

However, Janet Yellen and her team communicated that they were happy with the progress of the US economy over recent weeks despite signs of a recent slowdown.

The sudden repricing has seen the US Dollar index - a measure of broader Dollar performance - move higher to 99.13 at the time of writing.

The index was as low as 98.73 ahead of the event. The Pound to Dollar exchange rate has fallen to 1.2853 having gone as high as 1.2945. The Euro to Dollar exchange rate is at 1.0893 having been as high as 1.0935 prior.

“We have to respect the power of Dollar bulls,” says Kathy Lien, Director of BK Asset Management in New York. “The Fed recognised the recent deterioration in data but felt that the slowdown in the first quarter should be ‘transitory,’ and they completely ignored the surprisingly weak non-farm payroll growth in March by saying the labor market continued to strengthen.”

Lien believes the Fed might be guilty of blind optimism having looked through  poor retail sales which fell in the month of April.

“At this stage the dollar will probably continue to March higher into Friday's non-farm payrolls report as investors position for the labour market strength that the Fed is suggesting,” says Lien.

As expected, the Fed left monetary policy unchanged at the May FOMC meeting.

The accompanying statement was also little changed from March. “The key underlying message is that the Fed is adopting a wait-and-see strategy for now as it awaits more data,” says a note from Lloyds Bank in response to the events.

The implication of the largely unchanged statement is that a June rate hike is still very much on-the-cards.

“It was no surprise that the Fed held off from hiking interest rates on this occasion as it is only about six weeks since it last raised them, by 0.25%, and that was the second such move in the space of just over three months. We are forecasting two more policy rate hikes this year, with the next expected in June,” say Lloyds.

Pound Looking Fragile Against the Dollar

Turning to GBP/USD, we note the pair has come under pressure over recent days and some analysts believe this might be as good as it gets in the near-term.

The exchange rates has struggled in recent days to stay above 1.2905, the high made on the day Theresa May announced news of the snap election.

"The cable has since continually ran into resistance around 1.2950 which is the base of the 1.2950-1.3000 zone – the last support area prior to the breakdown that eventually led to the flash crash. Once support, this area is now providing resistance. The cable now needs to break support at 1.2835 and ideally 1.2775 if we are to see the start of a potentially sharp drop towards the 200-day moving average and support at around 1.2595-1.2600 area," says Fawad Razaqzada at Forex.com.

However, analyst Kathleen Brooks at City Index says it is still too early to write off the Pound, but this month's economic calendar must be obliging.

"An easy win for Theresa May next month combined with a pick-up in UK economic data could help GBP/USD break through the 1.30 barrier in the coming weeks. As we lead up to the election on June 8th June, UK economic data will be just as important as the polls for traders to keep an eye on," says Brooks.

 

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