Back
17 Apr 2015
Fed comments show June-September lift-off still on table – Danske
FXStreet (Barcelona) - The Danske Bank Research Team views that the recent Fed member speeches signal that a June-September rate lift-off plan is still on the cards, and further expect US bond yields to trend higher going into summer and EUR/USD to see parity over 6 months.
Key Quotes
“Fed speakers this week broadly signalled that the June-September window for lift-off is still relevant. Vice-chairman Stanley Fischer was maybe the most hawkish saying that ‘there’s one weak employment report and five or six spectacular ones before it’. He also repeated that he expects growth to pick up after Q1 and importantly, that he sees ‘signs of wages beginning to rise in a variety of places’. The latter is noteworthy as this is exactly what the Fed is looking for to become more confident that inflation will move towards its 2% target in the medium term, which is a prerequisite for lift-off.”
“Lockhart, who is in the dovish to neutral camp, said that he would prefer to hike later, referring to September rather than June. This is important because the markets are increasingly looking for a later date, now pricing it in December."
“As the US surprise index is expected to rise over the coming months from the very low point currently, we expect US bond yields to move slightly higher going into the summer. Normally yields move considerably higher in the three-month window ahead of the first Fed hike.”
“However, the relentless decline in German yields is having a spill-over effect on demand for US bonds as investors look for alternatives to German bonds. This is going to dampen the rise in US yields.”
“While EUR/USD has moved a bit higher over the past week, we believe that the next leg down will come soon as the US surprise index turns higher and it becomes clearer that a Fed hike is not very far away. We still look for EUR/USD to go below parity on a six-month horizon”
Key Quotes
“Fed speakers this week broadly signalled that the June-September window for lift-off is still relevant. Vice-chairman Stanley Fischer was maybe the most hawkish saying that ‘there’s one weak employment report and five or six spectacular ones before it’. He also repeated that he expects growth to pick up after Q1 and importantly, that he sees ‘signs of wages beginning to rise in a variety of places’. The latter is noteworthy as this is exactly what the Fed is looking for to become more confident that inflation will move towards its 2% target in the medium term, which is a prerequisite for lift-off.”
“Lockhart, who is in the dovish to neutral camp, said that he would prefer to hike later, referring to September rather than June. This is important because the markets are increasingly looking for a later date, now pricing it in December."
“As the US surprise index is expected to rise over the coming months from the very low point currently, we expect US bond yields to move slightly higher going into the summer. Normally yields move considerably higher in the three-month window ahead of the first Fed hike.”
“However, the relentless decline in German yields is having a spill-over effect on demand for US bonds as investors look for alternatives to German bonds. This is going to dampen the rise in US yields.”
“While EUR/USD has moved a bit higher over the past week, we believe that the next leg down will come soon as the US surprise index turns higher and it becomes clearer that a Fed hike is not very far away. We still look for EUR/USD to go below parity on a six-month horizon”