USD Analysis – 10th of May

Jarratt Davis

Special Consultant to the FPA
The USD remains a bullish currency in the longer-term, however the lack of a confirmed rise in core inflation and a cautiously neutral Fed have induced bearish sentiment on the USD in the short term. Dollar weakness is likely to continue until we get some solid tier one US data.

USD Analysis

Interest Rate

Fed Funds Target Rate: 0.50%

Last Change: December 16, 2015 (0.25%)

Expected Future Change: 11% chance of hike

Next Release: June 15


Inflation Target: 2%

Period: Year ending March 31

CPI: 0.9% Prior: 1.0%

Core CPI: 2.2% Prior: 2.3%

Next Release: May 17

PCE: 0.8% Prior: 1.0%

Core PCE: 1.6% Prior: 1.7%

Next Release: May 31


Month: April

Non-Farm Employment Change: 160,000 Expected: 202,000

Unemployment Rate: 5.0% Expected: 5.0%

Average Hourly Earnings: 0.3% Expected: 0.3%

Next Release: June 3


Period: Q1

Advance GDP: 0.5% Expectation: 0.7%

Next Release (2nd Estimate GDP): May 27

The US dollar weakened further during the end of April and early May as the Fed kept a neutral and cautious tone in the April 27 statement and collective economic data points failed to show any indication that the economy requires tightening.

The latest inflation readings saw both Core CPI and Core PCE decline by 0.1% from the prior month’s year-over-year reading – that is 2.2% and 1.6% respectively. The April FOMC statement drew attention towards the importance of monitoring inflation and implicitly signalled that inflation is not yet at a level where the Fed would be comfortable raising rates:

Inflation is expected to remain low in the near term... The Committee continues to closely monitor inflation indicators and global economic and financial developments.”

Given that the USD saw marked appreciation during most of 2015 on anticipation of rate hikes during 2016, the repricing of expectations is the cause of the USD weakness, despite the Fed still being the next central bank due to raise rates again. A pick up in inflation will be the crucial piece of the puzzle to allow tightening to continue.

Employment data for April, released May 6 saw non-farm payrolls print at 160,000, far below expectations of 202,000. The unemployment rate remained unchanged from last months reading of 5.0% as expected, along with average hourly earnings which reported an increase of 0.3% as expected, however last months 0.3% was revised lower to 0.2%.

The Advance reading for first quarter Gross Domestic Product missed estimates at half a percent, quarter-on-quarter, versus analysts consensus of 0.7%. However the breakdown saw some beats on estimates with Core PCE Prices for Q1 printing 2.1% versus expectation of 1.9% and the GDP Deflator printing 0.7% versus 0.6% expected.

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