US interest rate expectations have receded – Lloyds Bank

Gajan Mahadevan, FX Strategist at Lloyds Bank, suggests that the market has tempered its expectations of a US interest rate rise in June.

Key Quotes

“Over the past few months, the paring back of US interest rate expectations has been a key influence in GBP/USD’s rally from its 1.3835 low in late February, to its current level above 1.44. Fed Chair Yellen and other FOMC members favour a cautious approach to tightening and, although they have not ruled out the possibility that interest rates could rise in June, the market-implied probability has subsided from almost 50% in mid-March to just 4% after signs of weaknesses in the US economy.

US durable goods, retail sales and the most recent non-farm payroll reports all came in below consensus expectations, raising concerns about the strength of industry, the resilience of consumers and the sustainability of labour market gains.

The deterioration in data and softening in interest rate expectations have been reflected in the market’s dovish assessment of future policy tightening. Money-market rates now imply a less than 50% chance of a single 0.25% rise in US interest rates this year. We believe the market’s view of US monetary policy tightening has been pushed back too far. While the risk of a June rate rise has receded, we expect the Fed to still raise interest rates twice later this year.”