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May 19, 2016

FOMC minutes sends rate hike odds to 34%, Dollar index surges to 7-week high

FOMC minutes sends rate hike odds to 34%, Dollar index surges to 7-week high

The situation about increasing of Federal Funds Rate in June continue to heats up – this time from very hawkish statement from Fed official from Richmond. Fed Richmond President Jeffrey Lacker blamed markets on being too downbeat about the pause which Fed will take before another rate hike.

Lacker, known for his hawkish views, who is not a voting member this year of the FED, also told Bloomberg that he supported raising the rate at the April meeting and that it would be prudent to pick it up in March.
Of the members with voting rights, only the Fed President of the Kansas City Esther George disagreed with the rest of FOMC board, saying that she would prefer to raise the target rate range to 0.50% -0.75%.
Lacker added that there is “usual diversity of opinions”, but supposed there are strong fundamental grounds for raising borrowing costs in June.
His views are supported by the strong pickup in US labor market. For example, the number of Americans wishing to obtain first-time unemployment benefit was reduced last week to 278 thousand from 294 thousand, according to the report of US labor department. The pace of decline in the number of applications have become the highest since early February this year.

Experts interviewed by Bloomberg, on average, had predicted a decrease in the number of applications last week to 19 thousand. Consensus forecast of the experts interviewed by MarketWatch had anticipated a drop by 24 thousand.
A week earlier the number of applications peaked in this year and a significant decline is a signal that US labor market remains strong, experts say.

The average number of applications for the past four weeks, less volatile indicator, rose to 275.75 thous. with 268.25 thous. a week earlier.Meanwhile, the number of Americans who get unemployment benefits for the week ending 7 may, declined by 13 thousand – to 2.152 million. The figure for the previous week were revised to 2.165 million from 2.161 million.
As the rally of US Dollar extends, commodities and safe heavens suffer. In Thursday gold futures fell to a three-week low during morning American trades, as investors are trying to second-guess the likelihood FED rate increase in the next month.

Gold tumbled 1.71% to $1.252 per troy ounce, the steepest decline for recent months. The move looks like a pure speculation as rate hike odds are still low and Janet Yellen was too wary on her last meeting about the possibility of changes in June. But April 26-27 FOMC minutes released on Wednesday showed that the Central Bank will likely increase rates in June if US economic data from second quarter will show show rising inflation and employment levels.
As of Thursday morning, federal funds futures indicate 34% probability of raising rates in June, compared to 16% before the release of the protocol.

The growing likelihood of a rate increase in June prompted the dollar to 7-week highs. The USD index, which tracks the US currency against the dynamics of trade-weighted basket of six major competitors increased by 0.21% to 95.40, peak March 29.
A strong United States dollar usually puts pressure on gold, since it reduces the appeal of the metal as an alternative asset and makes dollar-priced goods more expensive for holders of other currencies.

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