After the weak GDP data earlier today, the market was looking for more guidance on when the FOMC will starting raising interest rates. The FOMC statement did not provide any clear guidance, but did brush off the weak data in Q1 as “due to transitory factors”. Many analysts and central bank watchers believe this means the door is still open for a rate hike.
On the other hand, the statement also noted that the FOMC needs to be “reasonably confident” that inflation will move towards its target in the medium-term, and wants to see further labor market improvements before shifting to tightening policy (raising rates).
Remember, the FOMC started the year with a very positive outlook anchored on improving data from the jobs market. We saw jobs data soften in Q1 among other economic data points. I think the tone of leaving the door open is simply a refusal to admit that they were wrong. They did acknowledge that data has been slower than expected, but the emphasis was that its based on transitory factors. The truth is, after this step back in Q1, it will take at least another quarter of data to start considering the rate hike. So, at best, the FOMC will look into it for September through the end of the year.
So, how do we play the USD? Let’s say we see the market price in a rate hike for June. I believe that would create opportunity to sell the USD again. On the other hand, we should not be too bearish on the USD neither. We can expect some further decline in the short-term especially if data fails to pick up. But if we start to see some improving US data for Q2, we will have to start limiting the bearish outlook for the greenback.
Essentially, without clear forward guidance, we should remain neutral-bearish on the USD and be aware of economic data trends in Q2.
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