Inflation Beats Expectations and Puts June Rate Hike Back on the Table

The U.S. central bank does not host a Monetary Policy Meeting in May. That does not mean the Fed will not impact the forex market this month. The U.S. Federal Reserve will release the minutes from the April Federal Open Market Committee (FOMC) on Wednesday, May 18 at 2:00 pm EDT. Several Fed members have stated that they see the possibility of multiple rate hikes in 2016, but so far the U.S. economy has not warranted a change in the benchmark U.S. interest rate.

The April FOMC was a mixed affair. On one hand the Fed did remove some language around risks abroad, but on the other hand it admitted to weakness in U.S. economic growth. Since the April Fed Meeting had no press conference the market was only guided by the statement which had very minor changes. The minutes from the April 27 meeting will fill in the blanks on how divided are Fed members about monetary policy. The unanimous vote in December seems the result of lobbying from Chair Janet Yellen rather than the result of individual assessments by the FOMC members. The minutes will be analyzed for clues about a possible June rate hike, however small the possibility.

U.S. consumer prices rose in April in what could be the start of firmer inflationary pressures that might trigger a Fed rate hike later this year. The consumer price index (CPI) increased 0.4 percent from the previous month. This is the largest one month increase since February 2013. The core CPI which excludes food and energy rose 0.2 percent. The rise in oil prices has boosted the price of gasoline and the retreat of the USD has made imports more expensive driving U.S. consumer prices higher. The above expectations inflation data has put June back on the table on the eyes of investors. The FedWatch Tool by the CME latest update points to a 18.8 percent probability of a rate hike in June, rising to almost 32.2 percent in July and 41.7 percent in September. Yesterday the probability for June was around 4%.

The EUR/USD lost 0.022 percent in the last 24 hours. The pair is trading at 1.1317 after being range bound for most of the day despite positive economic data that failed to boost the USD against the EUR. The USD was able to regain some of the losses against major pairs but most of the price action will be delayed awaiting the minutes from the FOMC. The monetary policy divergence that fuelled the USD rally in 2015 has slowly evaporated in 2016 as a global slowdown and a lack of growth in the U.S. put the dollar on the back foot. Fed members have tried to regain the trust of the market but continue to send mixed signals that are further eroding trust in their statements. The notes from the monetary policy meeting is expected to offer insights regarding the June, July and September FOMC meetings.

Fed members Kaplan and Lockhart both said today that a rate hike would be appropriate in the short term. Lockhart also mentioned that the presidential election is not a pic that comes up at FOMC meetings. That might be the case, but it will also be that non committal tone that leaves September out of the picture as the Fed will want to avoid appearing to show any bias to either party so close to the elections.

Forex Market events to watch this week:

Wednesday, May 18
4:30am GBP Average Earnings Index 3m/y
GBP Claimant Count Change
10:30am USD Crude Oil Inventories
2:00 pm USD FOMC Meeting Minutes
9:30pm AUD Employment Change
Thursday, May 19
4:30am GBP Retail Sales m/m
8:30am USD Philly Fed Manufacturing Index
8:30am USD Unemployment Claims
Friday, May 20
8:30 am CAD Core CPI m/m
8:30 am CAD Core Retail Sales m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar