Is The Fed Really Ready to Hike?

Market Drivers August 05, 2015

UK Services PMI bit lower but new orders better
New Zealand Employment slightly lower but still positive
Nikkei 0.46% Europe 0.80%
Oil $46/bbl
Gold $1085/oz.

Europe and Asia:
NZD Employment 0.3% vs. 0.5%
AUD AIG Services 54.1 vs. 51.2
GBP UK PMI Services 57.4 vs. 58

North America:
USD ADP 08:15

USD ISM Non-Manufacturing 10:00

The comments from Atlanta Federal Reserve President Dennis Lockhart reverberated through the currency market in Asian and early European trade today as the dollar continued to strengthen on the back of his statement that the Fed is "close" to a rate hike.

Mr. Lockhart said, "It will take a significant deterioration in the economic picture for me to be disinclined to move ahead." The statement had a huge impact on the market yesterday as Mr. Lockhart is viewed as a centrist by some analysts and therefore his words suggest that the Fed may be very serious about moving off the zero bound level as early as September.

However, in truth, Mr. Lockhart is closer to the hawks on the FOMC and his comments did not reflect a new position on his part as he had argued for rate hike on prior occasions. Even if the US labor data continues to print at 200K monthly run rate, workers as a whole have seen very little upward movement in their wages while core inflation has remained well below the Fed's 2% target.

The Fed therefore has little economic reason to tighten in September and any move to do so would be more political rather than economic in nature as FOMC members are eager to come off the zero bound level after 9 years of falling rates. Still it remains to be seen if the more dovish members on the Fed including the chairwoman herself will make the move next month.

Today the market will get the ADP and the ISM Non-Manufacturing reports both of which provide an early clue to the NFPs on Friday. If the data proves to be disappointing yesterday's dollar could unwind in North American trade. For now the euro has found some support at the 1.0850 level and could inch back towards 1.0900 if the US releases miss their mark.

Meanwhile in UK the PMI Services came in slightly lower at 57.4 versus 58.00 eyed but new orders rose to 58.6 versus 57.2 the period prior. Ahead of the news cable rallied strongly taking out the 1.5600 barrier but then traded back to 1.5575 on post news profit taking. Traders are eyeing tomorrow's UK calendar with great anticipation with some in the market dubbing it Super Thursday as the BOE releases its minutes, Inflation report and Governor Carney holds a presser.

There is still rampant speculation that the BoE may move on rates before the year end matching the Fed's more hawkish posture. Cable has been a relative strength trade amongst the majors and if tomorrow UK authorities suggest that they too are ready to hike, sterling could rise sharply especially against the browbeat commodity currency block.