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Fed officials continue more hawkish rhetoric - MUFG

10:00 23 May /2016 Forex

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has weakened modestly in the Asian trading session giving back some of the strong gains from late last week prompted by the hawkish shift in the Fed’s policy communication.

Key Quotes

“The hawkish shift was again evident in comments over the weekend from Boston Fed President Rosengren, a voting member on the FOMC this year, who stated that the US is on the verge of meeting most of the economic conditions that the Federal Reserve has set to increase rates next month.

More specifically he stated that the Fed has set a “relatively low threshold” for improvement on the growth front following weak growth in Q1. Employment growth was described as still “well above” what was needed for a gradual tightening of the labour market. He also stated that the US was “making progress on getting to inflation at 2%”. As the US economy is closer to full employment and inflation to their target, he is more confident now that a more normalised situation makes sense”. If the data continues to prove satisfactory, he would favour voting for a rate hike in June.

It was notable as well that he downplayed the importance of the upcoming EU referendum in the UK as a potential impediment to a June rate hike. He stated that “votes by themselves shouldn’t be a reason for altering monetary policy. However, “if we were experiencing significant changes in financial conditions that made us significantly alter the outlook going forward, that would be something to take into account”.

The comments suggest that he would be prepared to vote for a rate hike in June before the results from the EU referendum in the UK if financial conditions remained favourable and the perceived probability Brexit remained relatively low. The high likelihood that the Fed will resume rates hikes in the coming months should continue to support a stronger US dollar in the near-term. We do not expect developments in the week ahead to materially alter the outlook for Fed policy.”

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