USD benefits from Lockhart´s rather hawkish interview

Atlanta Fed President Dennis Lockhart caused a stir on the FX market overnight. Commerzbank notes his statement made in an interview that "the economy is ready and it is an appropriate time to make a change". It would take considerably weaker data to prevent him from voting in favour of a rate step at the September meeting. He did not mince his words then. And what makes his comments even more interesting is the fact that Lockhart is not exactly a hawk amongst the voting members of the FOMC. That would probably explain why the market finally reacted and why this morning a rate step in September is priced in with a probability of 50% for the first time this year.

"The dollar was able to benefit on a broad basis. Following the publication of the interview EUR-USD eased on a broad basis by one US-Cent and is this morning trading just above 1.0860. The psychological mark at 1.08, which has been limiting EUR-USD to the downside for the past three months has not been taken out yet. And in fact the fundamental situation on the FX market has not changed as much as the headlines and the exchange rate moves may suggest to some participants. In the end market participants continue to expect just one rate step this year and a maximum of three more in 2016. As long as that remains the case USD gains will be limited, states Commerzbank.

Lockhart admits that he has to fully rely on the correlations of the Phillips curve realising: i.e. the fact that price levels should sooner or later rise if unemployment is at a low level. 

According to Commerzbank, "Even over the coming weeks a clear cut inflation picture is unlikely to emerge, but that seems to be what the market is waiting for before pricing in a more aggressive Fed. That would then also catapult USD to new highs. So what matters is not the employment data today but the inflation indicators and those will not be available until Friday when the official labour market report is published including data on wage growth. The ADP would have to disappoint notably today to end the underlying USD positive sentiment already."