Analysts from Goldman Sachs (NYSE:GS) and Bank of America indicated that they expect the US Federal Reserve to raise interest rates three more times this year, and raised their estimates after data indicated persistent inflation and a strong labor market.
Producer prices rose in January by the largest margin in seven months, according to Thursday’s data, while a Labor Department report showed that the number of Americans filing new claims for unemployment benefits fell unexpectedly last week.
“In light of stronger growth and firmer inflation news, we are adding a 25 basis point (bp) rate hike in June to our Fed forecast, to reach a peak money rate of 5.25%-5.5%,” according to economists at Goldman Sachs, led by Jan Hatzius. he said in a note dated Thursday.
Meanwhile, money markets are currently pricing in a final rate of 5.3% by July.
Bank of America (NYSE:BAC) also expects a 25 basis point hike at the June Fed meeting, pushing the final interest rate to a range of 5.25%-5.5%.
He had earlier forecast two price increases of 25 basis points each in the March and May meetings.
“Rising inflation and strong employment gains mean that risks from this (only two rate hikes) are less than we expected,” Bank of America wrote in a note to a client.
After the latest US data, European investment bank UBS said it expects the Fed to raise interest rates by 25 basis points at the March-May meetings, which could leave the federal funds rate at a range of 5%-5.25%.
However, in sharp contrast to its US counterparts, UBS estimated that the Fed will cut interest rates at its September meeting this year.
Ahead of the latest US data, JPMorgan (NYSE:JPM) forecast the final interest rate at 5.1% by the end of June.
The majority of economists polled by Reuters ahead of the latest data said they expected the Fed to raise interest rates at least twice in the coming months, with the risk of them still rising. None of them expect a rate cut this year.
performance of the dollar index
The dollar fell against the euro and the pound sterling on Friday, as the market readjusted ahead of the long weekend and awaited clues as to how the Federal Reserve plans to continue to tackle still-high inflation.
Several Fed officials indicated this week that the US central bank is likely to raise interest rates higher to bring inflation back to needed levels.
“The market has sort of reset itself for the coming months. The most realistic scenario, I think, would be 25bp in March, and then another 25bp in May,” said Amu Sahota, Director of Klarity FX.
US data on Thursday showed monthly producer prices rose by the most in seven months in January as the cost of energy products rose, while the number of Americans filing new claims for unemployment benefits fell unexpectedly last week.
It came after data on Wednesday showed that US retail sales increased by the most in nearly two years in January after falling for two consecutive months.
“I think retail sales were great, and on that basis the Fed speakers helped solidify the idea of a more than expected rate hike,” Sahota said.
Fed fund futures traders are now pricing the federal funds rate as high as 5.29% in July, staying above 5% all year. The Fed’s target range stands at 4.5% to 4.75%, after rising rapidly from 0% to 0.25% in March 2022.
The dollar index fell in the latest transactions by 0.24 percent to 103.83, after reaching 104.67 earlier, the highest level since January 6.
“While the dollar is giving back some of its recent gains against the euro and the pound today, movements are relatively minor heading into the weekend. The market has already responded to the recent strong data results in anticipation of the Fed positioning the dollar,” said Otto Shinohara, managing director and chief investment strategist. On Mesirow: “Investors are waiting for more information which will act as a catalyst. … In the meantime, one can expect to reduce long USD positions and cover shorts in EUR and GBP following the recent rally in the dollar.”
The most important thing that awaits the dollar next week
The dollar awaits the minutes of the Federal Reserve’s Monetary Policy Committee meeting on Wednesday.
The report will explain the Fed’s expectations for the markets, and for the future interest.
On Thursday, the market will also await the Unemployment Claims report, which shows a week after the last stronger-than-expected economy.
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Technical outlook for the dollar index on a weekly Fibonacci basis
Subsidies: 101.972, 102.480, 102.794
Resistors: 103.810, 104.124, 104.632