USD: Timing of next Fed rate hike remains data dependent – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has remained on a stronger footing in the Asian trading session after strengthening modestly following hawkish Fed rhetoric at Jackson Hole.

Key Quotes

“Fed Chair Yellen’s stated clearly that the case for a further rate hike has “strengthened” in recent months signalling that the Fed is moving closer to resuming monetary tightening. The exact timing of the next rate hike remains unclear and dependent on incoming economic data.

Fed Vice Chair Fischer stated that Chair Yellen’s comments were consistent with the Fed potentially resuming rate hikes as soon as next month although he emphasized as well that the decision remains data dependent. He has been reassured by the strength of the employment reports in recent months which have been better than they have been for “sometime”.

The release on Friday of the latest non-farm payrolls report for August will be viewed with even greater importance now as another strong report is likely required to justify the Fed resuming rate hikes next month. Even if the August employment report is solid, it would still not be a done deal that the Fed will raise rates on the 21st September although we are more confident that the Fed will resume rate hikes this year.

It is view shared by the US interest rate market which has adjusted only cautiously to price in a higher chance of rate hike in September which is still judged at just over a “1 in 3 probability”. The market continues to remain sceptical over the possibility of a September rate hike although is more confident that the Fed will resume rate hikes this year attaching around a 60% probability that a rate hike will be delivered by December. It leaves plenty of scope for the US dollar to strengthen further in the near-term if the latest non-farm employment report is solid.”