Slack inflation data could hinder the pace of Fed tightening – Rabobank

FXStreet (Barcelona) - Previewing the FOMC meet, Jane Foley, Senior Currency Strategist at Rabobank, expects that the Fed might view the slack inflation data as a concern which might hinder the pace of Fed tightening, as a consequence of which profit-taking might be seen in USD.

Key Quotes

“In view of the sharp, broad based moves in the USD in recent weeks, it is fair to assume that the market is prepared for hawkish elements to be included in the Fed’s statement this week with at least the removal of the term ‘patient’ in reference to the timing of the first rate hike.”

“How much further hawkish rhetoric is included in the Fed’s statement this week will likely dictate whether EUR/USD can move to parity this spring or whether such a level is further away that it currently appears.”

“During her semi-annual testimony last month, Fed Chair Yellen left the risk of a June rate hike on the table but made no indication that she would exercise this option.”

“It is our view that the Fed will indicate that slack inflation data is a concern and that this could hinder the pace of Fed tightening. As a consequence we see scope for profit-taking in long USD positions this week on the back of the FOMC statement.”

“The divergence in policy expectations between the Fed and the ECB has been the primary driver of downside pressure in EUR/USD.”

“However, the start of QE from the ECB has also provided fresh incentive to Eurozone stock markets. Inflows into European stock funds may lend the embattle EUR some support going forward."

“While we see risk of some pullbacks in EUR/USD we continue to expect the USD to outperform medium-term.”