Forex – dollar bulls get a lift from Fed’s hawkish minutes

The dollar gained and stocks eased after some hawkish sounding noises from the Federal Reserve. Minutes from its last policy meeting in April reveal the US central bank is willing to raise rates in June, should the economic data warrant a move.

Here’s what we learned from the minutes:


June Meeting is Live


Fed policymakers have been stressing that June is a live meeting and the minutes confirmed this.

“Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labour market conditions continuing to strengthen, and inflation making progress towards the Committee’s 2% objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June," the minutes read.

This echoed comments from several Fed governors in recent weeks, who suggested that markets were not taking seriously enough their willingness to raise rates this summer.

Are Markets Wrong?


The hawkish signal from the Fed is at odds with the market expectations for rates. Federal funds futures trading before the minutes had indicated a less than 10% chance of a June rate rise as markets became increasingly pessimistic about the global economic backdrop.

The fed funds futures data has reacted with the chances of rates increasing next month now priced at one in three.

Other market indicators have moved, notably the US dollar, which tends to rise when markets anticipate tightening.

The yield on the 2-yr US Treasury note rose, while gold shed $24 to hit a three-week low. Asian equity markets suffered in the immediate aftermath of the release as the prospect of tightening by the Fed weighed on emerging market sentiment.


Jobs Market Firm


The Fed is increasingly optimistic about the US jobs market. Policymakers noted that increases in nonfarm payroll employment averaged almost 210,000 per month over the first three months of 2016. And while the unemployment rate barely moved, the labour force participation rate moved up.

 “Most participants continued to expect that, with labour markets continuing to strengthen, the dollar no longer appreciating, and energy prices apparently having bottomed out, inflation would move up to the Committee’s 2% objective in the medium run,” the minutes said.

Moreover, a surprise increase in retail sales in April indicates that wages are starting to filter through to the real economy a bit more. Traders will be eyeing the nonfarm payrolls data at the start of June with particular interest.


Brexit Risks


Fed officials may be bullish about the US economy, but they’re not blind to the risks to the global economy.

Among these, the prospect of Britain leaving the European Union is among the chief concerns.

“Some participants noted that global financial markets could be sensitive to the upcoming British referendum on membership in the European Union or to unanticipated developments associated with China's management of its exchange rate,” the minutes read.

Timing is critical here. The UK’s referendum on the EU comes just days after the Fed’s June meeting. Markets believe the Fed is unlikely to pull the trigger shortly before such a potentially disruptive event on global markets, but the minutes indicate that officials are largely focused on their domestic economy and remit, and less bothered about external events.

Indeed overall the Fed sees improvement in the global economy. “Recent indicators suggested that foreign real GDP growth had picked up in the first quarter after a lacklustre performance last year,” the minutes said.