OCBC’s Sim Moh Siong and Christopher Wong highlight that markets have repriced the risk of a July Fed hike higher after Oil-driven inflation worries, but still expect no move. A hawkish hold would keep the US Dollar (USD) supported by pushing tightening expectations further out, while a poorly explained pause could hurt Fed credibility, lift inflation breakevens and weigh on the Dollar over the coming months.
Hawkish hold would underpin Dollar
“The probability of a July Fed rate hike fell to just 10% following benign US inflation data but has since rebounded to 35% as higher oil prices reignited inflation concerns.”
“In short, markets have shifted from viewing a July hike as a remote possibility to a meaningful risk.”
“If the Fed remains on hold, as we expect, the market reaction will hinge on its communication.”
“A hold accompanied by hawkish guidance would likely push expected rate…
