Key quotes from the Commerz Bank FX report:
The market is excessively pessimistic about the Fed’s rate hike cycle. That is becoming increasingly clear from comments of FOMC members over the past weeks. John Williams, Esther George, Eric Rosengren and now also the President of the Richmond Fed Jeffrey Lacker, to name just a few.
Lacker even explicitly favors a rate hike in June. What is decisive for him is the development of inflation. Inflation was on track towards the 2% target and wage inflation, too, was clearly rising. Moreover, the downside risks still visible at the start of the year had disappeared.
The market remains little impressed by the comments of the US central bankers. They simply cried wolf too often. But perhaps the data might be able to convince market participants?
At the end of last week, the positive retail sales as well as the University of Michigan’s surprisingly strong sentiment indicator at least caused a USD-positive market reaction.
Admittedly, general sentiment is also likely to have played a role in this. Which means the litmus test for USD and the Fed is due today.
First of all, early trade seems to suggest that investors are not in favor of USD as much today. The commodity currencies in particular are on a strong footing in view of the rising oil price.
On the other hand, US consumer price data for April is due for publication today, currently the most important data for the Fed next to the labor market report.
If the data were to surprise to the upside this afternoon, then without supporting rate hike expectations and the USD notably, things are looking bad for the Fed.
After all, this would prove that the market participants do not even believe that the Fed's actions depend on the economic situation. A complete disaster for a central bank that depends on steering the market with the help of signals.
This morning the Australian dollar finds support not just as a result of the friendlier commodity markets, but also from the minutes of the latest meeting of the Australian central bank (Reserve Bank of Australia, RBA).
After all, the latter only contains explanations for the RBA’s decision to lower interest rates at its last meeting, but no reference to another rate cut at one of the next meetings.
For the majority of market participants, this suggests that the RBA therefore is not planning to ease its monetary policy further. And that may well be the case.
However, in my view the RBA has proven successfully that it reacts very quickly to inflation risks. I would therefore be cautious to now bet on a stronger AUD.
The RBA had no doubt not planned its last rate step at the beginning of the year either, and instead it was taken in reaction to the excessively strong AUD and the surprisingly low inflation levels.
The upside potential in AUD/USD is therefore limited.
For those who want to risk a look at the more distant future: April consumer prices from the UK are due for publication today.
Should the data surprise on the upside, hopes may arise that the Bank of England (BoE) may raise interest rates in the not too distant future, as it itself assumes in its baseline scenario – at least a future without a Brexit.
However, less than 5 weeks before the referendum this is unlikely to affect the GBP exchange rates in a major way.