Market Insight – Fed Preview

Next the Federal Reserve rate decision is set to be one the most highly anticipated of the year as the central bank is tipped to stop its recent cycle of rate hikes.

Notably, other global central banks have continued to raise rates, with the Reserve Bank of Australia and the Bank of Canada raising interest rates just this week alone.

Currently, the Fed RateWatch Tool shows just a 25 percent chance of rate hike, which shows the market has clear bias for the Fed to pause going into the June meeting.

Yesterday, the United States posted really bad jobs figures. This alone may make it really difficult for the Fed to hike as the unemployment rate is rising and initial claims data on a weekly basis spike.

Danske Bank is noting that they expect the Fed to hike next week. This is going against consensus forecast, so it is particularly interesting to hear the rationale behind the banks thoughts.

The team at Danske bank notes that “We expect the Fed to maintain rates unchanged next week, markets price in a modest 25% probability of a 25bp hike.”

And they state that the “Focus will be on communication around potential hike in July & the updated dots. The Fed is unlikely to close the door for hikes, but we doubt they will materialize.”

Furthermore they add that “We see downside risks to consensus expectations for May CPI and forecast +0.2% m/m (4.2% y/y) for headline & +0.3% m/m (5.2% y/y) for core.”

Just to add further clarity they confidently state that “We make no changes to our forecasts and expect the Fed to maintain rates at the current level for the remainder of the year. A pause could pose near-term upside risks to EURUSD, but we still maintain a bearish view on the cross towards H2.”