Monthly Wrap: USD – US dollar firms on high hopes for Fed interest rate hike

Philip McHugh June 7th 2018 - 2 minute read

Key Takeaways:

  • US dollar rose as climbing inflation boosted Fed rate hike odds
  • Markets rattled by renewed US-Iran sanctions
  • USD Monthly lows: £0.73, €0.83, AU$1.31, NZ$1.42, C$1.27
  • USD Monthly highs: £0.75, €0.86, AU$1.34, NZ$1.45, C$1.30

The US dollar put on a mixed performance in May, with advances against the pound and euro being countered by volatile trading against the Australian dollar and Canadian dollar.

The US currency derived some support from the news that May’s unemployment rate fell to a 17-year low at 3.9%, although there were less new jobs added to the economy than first thought.

Meanwhile, April’s inflation rate was reported higher last month, solidifying hopes that the Federal Reserve could commit to a June interest rate hike and boosting the US dollar in the process.

Beyond the economic news, the US dollar was also shifted by the decision to withdraw the US from the Iran nuclear deal, first signed up to in the Obama administration.

The decision resulted in a sharp rise in global oil prices, as fresh US sanctions against Iran risked cutting output from the world’s 5th largest oil producer, and a rallying US dollar.

May ended with less supportive international news however, when the US pressed ahead with tariffs against metal imports from the EU, Mexico and Canada.

This was a significant upset for global trading relationships and quickly led to talk of retaliation, softening the US dollar in the process.

The coming weeks could continue last month’s USD exchange rate volatility, with inflation data and a Fed meeting being two potential catalysts for movement.

May’s inflation readings are forecast to show slowing price growth, which might drive the US dollar down against the pound and euro.

Slowing inflation isn’t expected to change the Fed’s course when it makes its mid-year interest rate decision, however, and a rate hike from 1.75% to 2% is predicted.

Markets have been pricing in this interest rate increase for weeks now, but the US dollar could still strengthen on the news and advance against its currency rivals.

The risk of USD exchange rate volatility will remain in late June, with high-impact GDP and goods orders data scheduled for release.

The orders stats might support the US currency if they show a forecast-matching rise, but if Q1 GDP growth is confirmed to have slowed then any US dollar gains may be minimal.

Beyond these economic announcements, monthly US dollar movement could also be affected by any escalation of the trade war involving the US and Canada, Mexico, China and the EU.

There will also be a meeting between US President Donald Trump and North Korean leader Kim Jong-un on 12th June.

If the historic meeting eases tensions between the two nations it could prove positive for the US dollar.

Written by
Philip McHugh

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