The USD has traded mixed since the December rate rise, weakening against safe-haven currencies such as the euro and yen, while strengthening against commodity currencies and the pound.
Rate hikes and unemployment
On January 6, the minutes were released from the December meeting and showed that some members saw liftoff as a close call and many were quite concerned about low inflation. Most Fed members expect between 2 and 4 interest rate hikes this year, however given recent data releases, such as weakness in the Retail Sales Control Group for December, released January 15, the market is now pricing approximately 1 to 2 hikes.
The USD is a long-term bullish currency given the tightening of monetary policy by the Fed
The employment situation in the US remains the shining light with another solid gain of 292,000 jobs for December and an unemployment rate of 5%. Average earnings however remains a concern, coming in flat for the month. Fed members have stated that they have met their mandate on employment but inflation remains the key concern. This has caused much attention to turn to average hourly earnings as economists generally tend to see an increase in wage inflation as a precursor for price inflation. Average earnings will continue to garner attention and is arguably becoming more significant that the headline NFP change.
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Lacklustre inflation remains a major concern for the Fed with Core PCE failing to break above 1.3% y/y from January to the latest release for November. Core PCE price index showed only 0.1% increase for the month of November. Headline PCE was at 0.4% y/y, kept subdued by lower oil prices. CPI for November, released December 15, came in as expected with headline inflation for the month flat at 0.0%, and 0.5% since 12 months prior. Core CPI was in line with expectations rising 0.2% for the month and 2.0% for the annual period. Growth for the third quarter was at 2.0% annualised. The market will be looking out for Advance Q4 data on January 27.
The USD is a long-term bullish currency given the tightening of monetary policy by the Fed. However doubts are beginning to emerge about the speed of rate hikes and the USD has been trading as a neutral currency of late; it provides an excellent counter currency to sell commodity currencies against, and also to buy safe-havens, such as the yen and euro, against. This neutral sentiment is likely to continue until we get the next set of inflation date which may boost or weaken sentiment in the currency.