I have a distinct feeling the U.S Federal Reserve is going to suggest via their FOMC Statement tomorrow that another increase of the Federal Funds Rate is likely going to happen in June. I could definitely be wrong, but my gut instinct is rumbling.
Inflation Remains a Sincere Problem Per the Fed's Thinking
Wage data demonstrated last Friday via U.S Personal Income that inflation remains stronger than expected. Yesterday's ISM Manufacturing Prices reading also spiked to 53.2 versus the expectation of only 49.4. The increases shown within these economic reports will not please the Federal Reserve.
While a hike tomorrow is nearly a certainty, the Forex market remains rather unimpressed with the potential for an increase on the 14th of June. Behavioral sentiment has shown a rather polite USD actually losing momentum the past few days. Caution has seeped into the USD today, but are financial institutions too relaxed regarding a potential hike by the Fed in June?
USD/AUD 5 Day Chart as of the 2nd May 2023
Reserve Bank of Australia's Hike Earlier Today Caught Many Folks Unready
The Reserve Bank of Australia's hike today, may be another sign the U.S Fed will not only hike tomorrow, but in June as well. What are the chances the Federal Reserve hinted strongly to the RBA, that if they wanted to protect the value of the AUD that an increase would be justified in order to guard against the Fed's rhetoric to come? The Australian hike caught a lot of financial houses and day traders unprepared as the USD/AUD spiked lower this morning, for proof of the surprise simply look at the gap created downward today on the five day chart of the currency pair.
The RBA hiked their Cash Rate by 0.25% from 3.60% to 3.85% while sighting stubborn inflation as a main cause. Nothing is certain, but if the Federal Reserve's FOMC Statement is rather strong tomorrow and says it will still consider a June increase perhaps we should not be shocked. Central banks do share information with one another.
Early February's Rhetoric from the Fed wasn't Treated Seriously at First Glance
Coincidentally, the Fed's increase in early February was two days before the Non-Farm Employment Change and Average Hourly Earnings were reported on the 3rd of February. On the 1st of February the Federal Reserve warned that inflation remained stubborn, but the market didn't take their words too seriously as the USD traded rather politely following the anticipated interest rate hike.
However, the USD gained violently the day after when Fed officials began to reiterate the strong tone from Fed Chairman Jerome Powell from the day before. And then stronger than expected jobs numbers followed on Friday. Note, that the Non-Farm Employment Change and Average Hourly Earnings will be published this coming Friday.
The Federal Reserve remains in a difficult position, a hike tomorrow will bring the Federal Funds Rate up to 5.25%, a June hike may not be welcomed by the broad financial markets, particularly equities in the near-term, but people may want to consider the possibility of it happening. Day traders should brace for strong price velocity developing. Tomorrow's Forex action will be violent for speculators who are not ready, and if the Fed suggests a potential hike to 5.50% in June perhaps we should not be stunned.