Fed Signals Less Global Concern but No Urgency Either – MUFG

Fed Signals Less Global Concern but No Urgency Either – MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the dollar is generally unchanged versus most currencies (except the yen and kiwi) after the April FOMC delivered few surprises.

Key Quotes

“Given the April FOMC does not incorporate any forecast updates or a press conference there was little expectation of much surprise at this meeting – and that’s exactly what we got. The reference to domestic economic activity was downgraded with economic activity appearing to “have slowed” while growth in household spending had “moderated”.

But the key highlight was the indication of reduced fears over the past volatility in financial markets with the statement not including the March comment that “global economic and financial developments continue to pose risks”.

Given crude oil prices are now 70% higher from the low hit on 11th February and given the flow of data from China has improved; there was every justification for the indication of reduced concerns. But that in of itself does not necessarily signal a likelihood of a rate increase at the June meeting.

The downgrade to the domestic economic description serves as a reminder that weakening economic growth might provide the justification for a further delay beyond June. What is for sure is that the jobs data in May and June before the June meeting will be crucial. Those data releases could largely determine whether the FOMC acts in June.

The only other variable that could take on greater importance is the impact ‘Brexit’ concerns are having on global market conditions by the time of the FOMC on 15th June. The referendum is exactly eight weeks away with the ‘Remain’ campaign pulling ahead over the past two weeks.

We would be very surprised if that gap remained stable and there is certainly a risk of greater volatility in European markets that prompts the FOMC to hold off until July. That decision of course would have to be balanced against the strength of domestic economic data over the next seven weeks. With US yields softening and after the surprise BOJ and RBNZ decisions, the dollar is likely to trade weaker over the short-term.”