Fed's hawkish pause met with market opposition

Macroeconomic snapshot

The macroeconomics situation of the US has improved slightly better than anticipated and is likely to improve further. This is expected to reduce upward support on the dollar’s value.

June meeting of the Federal Reserve’s, federal open market committee

• The Federal Funds rate was held in June at 5.00%-5.25%, following the 0.25% hike in May
• The next meeting is on Wednesday the 26th of July
• The Fed’s hiking cycle and now pause has progressed as anticipated and is not expected to rise much further, even if the Fed suggests it might. This is likely to lead to stabilised treasury bond yields which could limit their appeal to investors. This is expected to reduce upward support on the dollar’s value.

GDP growth rate report for Q1 2023, second estimate

• GDP in the US for Q1 expanded at an annualised rate of 1.3% which is much slower than the 2.6% in Q4 2022
• The final Q1 report is due on Thursday the 29th of June
• The economy has grown faster than anticipated and is expected to grow a bit faster. This is likely to lead to increased stock market prices and a shift in investor preference away from safer assets, such as government bonds. This is expected to apply downward pressure on the dollar’s value.

CPI for May

• CPI in the US for May significantly slowed to 4.0% annual inflation from 4.9% in April
• The June report is due on Wednesday the 12th of July
• CPI has fallen slightly faster than anticipated and is expected to fall much further. This is likely to lead to stabilised interest rates and a shift in investor preference away from safer assets, such as government bonds. This is expected to apply downward pressure on the dollar’s value.

Labour report for May

• Unemployment in the US for May is 3.7% which is much higher than the 3.4% in April
• The June report is due on Friday the 7th of July
• The labour market is a contradiction as both employment and unemployment rates rise. This is likely to lead to reduced growth and a shift in investor preference towards safer assets, such as government bonds. This is expected to apply upward support on the dollar’s value.

Russian invasion of Ukraine

• The war is having a detrimental effect on the global and US economy by causing higher energy prices, higher food prices, higher inflation and is impacting economic growth. This is expected to apply upward support on the dollar’s value.

China-US trade war

• The trade war is having a detrimental effect on the global and US economy by causing higher prices for consumers, increased uncertainty for businesses, disrupted supply chains, job losses and is impacting economic growth. This is expected to apply upward support on the dollar’s value.

Previous three months (March to May)

The dollar lost value in the past three months from March to May, however it did start to recover from the lowest level of 101 in mid-April after hitting a low of 101. This regained strength can be attributed to investors pricing in interest rates staying higher for longer. This is because the Fed has not made any dovish statements or considered cutting rates after the banking crisis.

Month to date (June)

The dollar has lost value through this month having fallen from its peak of 104 at the start of the month towards 102 today. This can be attributed to the Fed’s pause, falling inflation and disbelief that the Fed will continue to hike this year as was indicated by the updated projections.

Outlook

The events to keep an eye on

• Monday the 19th of June: National Holiday Juneteenth.
• Tuesday the 20th of June: FOMC Member Williams Speaks historically neutral regarding rates.
• Wednesday the 21st of June: Fed Chair Powell Testifies historically neutral regarding rates. FOMC Member Goolsbee Speaks historically dovish regarding rates.
• Thursday the 22nd of June: Fed Chair Powell Testifies historically neutral regarding rates.
• Friday the 23rd of June: Services, Manufacturing PMI’s.

CME Group 30-Day Fed Fund futures

• July: rising sentiment of a 0.25% hike, 75% in favour.
• September: rising sentiment of a hold, 70% in favour.

Long Term Value of the US Dollar to Steadily Decline: As the US and global economy improves, investors are likely to move away from the safe haven of the dollar. Moves are expected to remain below the three month swing high of 105 unless multiple rate hikes begin to be priced in or the banking crisis deteriorates.

Short Term Value of the US Dollar to Stabilise: The June FOMC meeting appeared to be a hawkish pause as they raised the terminal rate from 5.1% to 5.6% for this year but market sentiment is in opposition, most likely due to the quickly slowing inflation rate. The Fed may be concerned by this as they know a bullish stock market is likely to increase the risk of inflation staying higher for longer. It is possible that the Fed speakers are going to turn up the hawkish rhetoric and thus dollar selling may steady out. Moves are expected to remain above the three month swing low of 101 and below 103.