USD Update – Forex Trading Tips

Fundamental Bias: Bullish

Interest Rate

Fed Funds Target Rate: 0.25%

Last Change: December 16, 2008 (0.50%)

Expected Future Change: Increase (Q3 – Q4 2015)

Next Release: July 29

Inflation

Inflation Target: 2%

Period: Year ending June 30

CPI: 0.1%

Core CPI: 1.8%

Next Release: August 19

Employment

Month: May

Non-Farm Employment Change: 223,000 Expected: 231,000

Unemployment Rate: 5.3% Expected: 5.4%

Average Hourly Earnings: 0.0% Expected: 0.2%

Next Release: August 7

Growth

Period: Q1 (annualised)

Final GDP: -0.2% Expected: -0.2%

Next Release (Q2 Advanced GDP): July 30

Summary

• The Fed have stated they are data dependent; they are watching inflation and employment closely to inform their decision of when to raise rates. They have stated that a rate hike is possible at any meeting going forward.

• The Fed’s main employment focus is Average Hourly Earnings, given that the unemployment rate is sufficiently low at 5.3% and over 200,000 new jobs have been created in every month for the last year, except for March.

• Current market expectations are for a rate hike during the second half of 2015, most likely in December.

• Core CPI readings, released July 17, came in at 1.8% for the year-on-year and 0.2% for the month of June. Both up 0.1% from the prior month.

• Non-Farm Payrolls, released July 2, showed 223,000 jobs added and Average Hourly Earnings fell to 0.0%, which is the lowest growth since December 2014.

• Final GDP, the second revision to Q1, printed as expected at -0.2%, up from -0.7% in the Preliminary reading. Negative numbers show the economy is contracting.

Analysis

The USD over recent months has returned to its fundamental bullish state as data has improved since Q1. During the second quarter we have seen both employment figures and CPI come in either better or close to expectations, which overall is positive for the USD. Further to this, Fed Chair Janet Yellen has confirmed on more than one occasion that a rate hike is appropriate this year and that the US economy is expected to strengthen. The dollar has continued its rally in recent weeks.

In their most recent FOMC statement released June 17, the Fed said growth is expanding moderately after stalling in the first quarter and that the labor market is in fact picking up. “Information received since the Federal Open Market Committee met in April suggests that economic activity has been expanding moderately after having changed little during the first quarter. The pace of job gains picked up while the unemployment rate remained steady”. The Fed have kept their options open by not focusing too heavily on the prior poor data, and should the incoming data prove this was merely a blip on an overall strengthening economy, they can move on rates as and when they wish – perhaps at the September meeting. In that recent statement they also repeated their forward guidance that: “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

In the minutes that reflected the June meeting, released July 8, the Fed showed concerns over the situation in Greece: “Many participants expressed concern that a failure of Greece and its official creditors to resolve their differences could result in disruptions in financial markets in the euro area, with possible spillover effects on the United States” Given that these minutes are outdated by three weeks and the situation in Greece has only become more dire since then, it is fair to presume that the Fed are watching the situation carefully. This Sunday, July 12, is the final deadline for a Greek deal and should a deal not be reached we will see Greece exit the European monetary union. If the knock-on financial effects are not contained we may see the Fed delay rate hikes until they see financial stability return. At this stage it is too early to know which direction events will turn. A deal for Greece this weekend will relieve much pressure in financial markets and see a reversal of recent risk-off trades. Overall however, the Fed minutes shed little new light and affirmed the committee is on track to raise rates this year.

On July 15, Fed Chair Janet Yellen gave a testimony on the Monetary Policy Report with text released 90 minutes prior. The text release revealed her optimistic view of the US recovery and reaffirmed that rates are due to begin being raise this year. This provided bullish sentiment on the USD and we expect this to continue for the medium-term – provided the data doesn’t disappoint.

The recent jobs report under-performed expectations but only marginally and was still over 200K. The unemployment rate printed better than expected at the lowest rate since April 2008, but it was for the wrong reasons – more people stopped looking for work last month. More of a concern from this report was the weak Average Hourly Earning print at 0.0%, the large revision of last months print from 280K to 254K, and the lowest participation rate since the 1970′s. This could cause a delay for a rate increase into Q4 but it shouldn’t take away from the overall sentiment of USD bullishness over the medium term. The Fed have stated they are watching earnings growth, therefore the recent down tick to zero growth for the month of June may be somewhat unsettling for the hawkish members.

Regarding inflation, Core CPI has risen 1.8% during the 12 months ending June 30. Comparatively, CPI including Food and Energy is has risen only 0.1% for the same period – showing the massive impact of oil prices. To reach their objective of 2% inflation the Fed need to be confident that Core CPI is trending towards that level – this is a requisite condition before raising rates.

The US is still on track to be the first country out of the major currencies to increase interest rates. Therefore, the US dollar remains a bullish currency in the medium term.