The Fed leaves the door widely open for a policy rate hike next month after the FOMC statement overnight, as it described the slowdown in growth in the 1Q as “transitory”, also inflation had been “running close” to its target.
- Historical data shows Fed didn’t slow the pace of rate hike even as economic activities slowing down. Citigroup economic surprise index dropped before Fed raised the rate on Dec. 2015 and 2016. In other words, recent slowing down in U.S. growth alone is not justified to call for no rate hike in June.
- According to CME FedWatch tool, probability of rate hike next month increased to 71% from 67% before the latest Fed statement
- S. 2-year sovereign bond yield rose 3bp overnight after Fed statement, indicating bets on to act next month increase
- Given Macron likely to win the French election this weekend, euro may further gain versus dollar; dollar long positions might be built through USD/JPY
Fullerton Markets Research Team
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