US Dollar Strength Seen As Barrier To Rate Hike

The messages from the Fed are getting crowded, decreasing the visibility for the Fed’s policy path in the second half of the year. Although perceived as dovish, the common sense would suggest that the FOMC would not act in June meeting. Interestingly however, the initial conditions for a rate hike were mostly gathered – diminishing slack in the labour market, satisfactory unemployment rate – but the Fed came out with new variables in its rate-hike equation. The US dollar strength is now shown as a barrier to the rate hike. Indeed, higher rates will theoretically lead to a stronger USD. If the Fed waits the dollar to soften before proceeding with the first rate hike, we can keep on waiting.

June meeting brings out concerns regarding the communication of the Fed. The vanishing interest in express macroeconomic targets (unemployment, inflation) will likely transform the Fed bets increasingly crowded. Looking at Fed Chair Yellen’s speech, the temptation to respond to the IMF’s call to delay the first rate hike has led to confusion. There are two ways of processing this information.

1. Yellen considers pushing the first rate hike to March next year and the recent contraction in the US gross domestic product, the slide in oil prices, the insufficient wages growth could serve as justifiable reasons.

2. Yellen will proceed with the first rate hike before the end of 2015, as she mentioned below, yet announce a softer normalisation path to not upset IMF’s Lagarde. From what we observe today, the first rate hike has more chance to happen in December rather than in September. The pricing in sovereign yields suggest 52% chance for a December hike, down from 60% preceding yesterday’s meeting.

EUR/USD moves away from parity

The broad based sell-off in US dollar pushed euro up to 1.1420 in European open. Besides and despite the Greek deadlock, the US dollar appreciation against the euro at the beginning of the year seems to back fire. The EUR/USD diverges from the parity as expectations shift toward a neutralisation within 1.10/1.20 range; with slight positive bias in the short run should the pair breaches the 1.1467/1.1550 supply zone successfully.

European markets lacklustre despite gains in US markets

European equity markets continues to look lacklustre despite a better session in the US overnight, with the Greek crisis coming down to the wire now. With relations now so bad, a deal today at the Eurogroup meeting seems more than a little implausible. Middle ground for Greece and its creditors is fast becoming untenable and markets are finally starting to take notice. When Alex Tsipiras says that he’d rather Greece default than endure more austerity, he may actually get what he wants.

Despite the lack of commitment to monetary tightening from Janet Yellen last night, the FTSE is once again under pressure. The June futures price action is pressing against its 200 DMA at 6659. This area has held as support recently so should we see a break below the we can expect to see quite a decline lower. A weaker dollar is helping to support metals prices and with gold looking to challenge the $1200/oz marker we are seeing resource stocks taking the top spots on the index in early trade. The materials sector is the only one in the green this morning.

Conversely, the utilities sector, which has outperformed the benchmark recently owing to the broader market sell off is in the back seat today.

Randgold Resources (LONDON:RRS) (+2.46%) a hold recommendation reiteration from Investec and a stronger gold price on a dovish FOMC have pulled Randgold shares back from a 3 month low today. The median target price from 23 brokers is 5256p. Since hitting its 52 week high of 5840 back in February, the stock has followed the trajectory of the gold price and shed over 20%. Current levels have provided a buying opportunity over the past 4 months.

Fresnillo (LONDON:FRES) (+2.39%) fresh from a broker upgrade and Anglo American (LONDON:AAL) (+1.83%) are also in demand.

Poundland (-5.56%) The discount retailer made an underlying pre-tax profit of £43.7m in the year to March 29. Sales were slightly weaker than expected and a lot lower than the 7.1% growth seen in Q4. This was to be expected given that the major supermarkets are finally starting to see the light in relation to cost cutting and service improvement. Outlook for H2 is better with plans to open at least 60 stores in the UK and Ireland this year.

The shares are under pressure this morning but that has been the case since hitting the all-time high in February, the share price has declined 30% since then and looks to be targeting the all-time low of 284p last witnessed in May 2014.

US CPI will be the main focus today particularly since Yellen wishes to see more evidence that the metric is seeing improvement prior to hiking rates. A rise of 0.5% month on month is expected here.

We are calling the Dow down 10 points to 17925.