The Mighty Dollar Remains the Strongest Currency on June Hike Chances

This article was written by Jarratt Davis. Jarratt is a professional trader and educator and owner of www.jarrattdavis.com.

The US dollar saw massive strength on May 18 when the minutes from the April 26-27 meeting were released. Previously, the market had all but discounted the chance of a June 15 hike with Fed fund futures pricing close to zero probability in early May.

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These chances then edged higher during mid-May when a whole list of Fed speakers made optimistic comments about the US outlook, and some specifically mentioned that a June hike is an option and the market is not pricing this risk correctly. This mispricing was realised upon release of the minutes, with the key sentences being:

"Participants discussed whether their current assessments of economic conditions and the medium-term outlook warranted increasing the target range for the federal funds rate at this meeting."

"Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June."

Fed funds futures jumped to a 33% chance of a June hike after the release as the dollar boomed across the board. Incoming data will now determine the chances of Fed action in June, most importantly Core Personal Consumption Expenditure on May 31.

Inflation data for April so far has been reasonably solid. Core CPI year-over-year, released May 17, remained above the Fed's target of 2.0%, albeit declining from 2.3% in February to 2.1%.

Core PCE - the Fed's preferred measure of underlying inflation - sits at 1.6% y/y, up from 1.3% in late 2015. If underlying inflation measures continue to remain steady or move higher, this dispels the Fed's concerns which were cited earlier in the year that the rise in core inflation may be associated with transitory factors.

Employment data for April, released May 6, saw Non-farm Payrolls print at 160,000, below expectations of 202,000.

The Unemployment Rate remained unchanged from last month's reading of 5.0% as expected.

However, Average Hourly Earnings were positive, showing an increase of 0.3% for the month, as expected. February's reading of 0.3% was revised lower to 0.2%.

Wage inflation is arguably the most important component of the US jobs report given the focus on consumer price inflation, of which it's a supposed precursor.

The USD remains a bullish currency in the longer-term, and the recent minutes from the April FOMC meeting have served to reaffirm this bullish bias and drive positive sentiment into the currency. We expect the dollar to rally into June, provided the data does not disappoint.