The message from the June FOMC statement and minutes and from Yellen’s July 2 IMF speech has been that the Fed is in no hurry to begin the rate hike process, notes BNP Paribas.
Given this, BNP thinks that the interesting scenario for the USD in today’s semi-annual policy testimony from Chair Yellen would be if she were to force markets to bring forward their pricing for the beginning of the Fed tightening cycle.
“However, our economics team does not expect today’s message to differ notably from what was communicated in the statement, press conference and FOMC minutes (of June 18). While jobs data has beaten expectations, GDP components have been generally weak. With asset purchases not expected to end until the October meeting, the FOMC likely sees no reason to clarify its intentions on the timing of rate hikes at this time,” BNP projects.
“On the data front, we expect a solid 0.4% m/m gain in June core retail sales and an 0.6% gain in the headline number. However, front-end rates and the USD have seemed less responsive to better US data of late, seemingly waiting for a clarification of the Fed’s exit plans rather than adjusting rate hike expectations around data releases,” BNP adds.
“We maintain our long USD exposure via long USDJPY and short EURUSD and also a carry play (short EURNZD) into Yellen’s semi-annual policy testimony to Congress on Tuesday and Wednesday,” BNP advises.