The recent upside surprise to US core CPI inflation will set the stage for a rebound in Fed rate-hike expectations. The likely growth improvement in Q2 will thus come against a more stable inflation backdrop.
Moreover, the Fed statement on 29 April is unlikely to shift to a more dovish tone despite weak Q1 data-flow. Consequently, the downdraft in short-end USD rates due to the Q1 soft patch should now have run its course.
The market view on the Fed policy rate path became more dovish during Q1. In addition, it remains significantly more dovish than the path implied by the Fed projections, despite the sharp move lower in the median 'dots' at the 18 March FOMC meeting.
The market is now fully pricing in only one 25bps rate hike by end-2015 and just a little over two hikes for 2016.
Standard Chartered maintains almost double that amount of tightening for 2015-16, while the Fed projections point to an even more hawkish trajectory.
Indeed, for the short end of the USD rates curve to rally much further from here would require it to price out any hikes at all this year.
