Dovish June FOMC Statement Shows Importance Of Official FOMC Interpretation

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Includes: FORX, UDN, USDU, UUP
by: FX Analyst
Summary

Recent June FOMC statement came out more dovish than expected, as it dismissed the progress made by the US economy in May.

However, the FOMC still restrained the liftoff expectations to this year, and further economic strength could still bring the liftoff forward to September.

Further economic data are now subject to official FOMC interpretation, and this dovish FOMC statement had triggered a new trend of USD weakness.

Burst Expectations

The long awaited June FOMC statement had finally been released. Prior to the much anticipated release, US economic data showed that the economy performed much better than expected in May after a lackluster April performance. This led to widespread market expectations that the FOMC would strike a more hawkish tone and set the stage clearly for a September 2015 liftoff.

The only clink in the armor was the cautious attitude of the USD. For example, after the strong May labor report was released, the USD spiked up on the day of the release and then weakened the next trading day. Initially, I was under the impression that this was merely due to caution after a weak April data and the USD would rally after a strong FOMC statement. Now, with the benefit of hindsight, it is clear that the market was positioning for a dovish FOMC statement.

The FOMC statement was considered to be more dovish, as it did not acknowledge the progress made in May. Instead, the FOMC chose to focus on the relatively weak April data released in May instead of the stronger May data released in June before the meeting.

FOMC's Dismissal Of US Strength And Accepted Weakness

The strength of the US economy can be seen in the sectors of labor, housing and consumption. It would appear that sustained recovery in this sector is not enough for the Fed to upgrade its assessment of the economy from "expanding moderately" so far for Q2 2015 compared to "expanding at a solid pace" as described in January 2015 for Q4 2014.

As for the labor market which had been the consistent performing indicator of US strength, the FOMC merely dismissed that the under-utilization had "diminished somewhat". This dismissal applies to the progress made so far in the housing and consumption markets even when leading consumption indicators like the University of Michigan consumer confidence survey are positive.

As for the weak points of the US economy, such as business fixed investment and net export weakness, the FOMC acknowledged it fully. Net export weakness was due to the weaker USD, and business fixed investment was an indicator of both constrained credit conditions and the application of weaker business confidence.

Rates Liftoff Expectations

This is indeed quite bad news for market expectations of a rates liftoff, as the Fed is tight lipped about the possible rates liftoff. Specifically, there is no mention about the next rates liftoff. Hence, this would mean that we would have to make a guess from its given material.

The FOMC has provided material to set the boundary for this discussion of a rates liftoff. According to Fed Chair Janet Yellen's press conference material, the majority of FOMC members (including non-voting members) agreed that this year is the year for a liftoff.

Source: June 2015 FOMC Press Conference Material

Hence, there are some expectations that the next liftoff could be in December 2015 as constrained by the materials provided. However, this remains to be seen as the Fed remains data dependent. Further economic performance could impact the rates liftoff decision, and the economy could build on the momentum in May.

In addition, it is possible that the FOMC had not fully considered the full May data, and we can still see a more bullish FOMC in next month's meeting. Hence, it is still possible that liftoff could happen in September instead of December on better economic data.

Impact On USD

This disappointment had a big impact on the USD as seen on the PowerShares DB US Bull ETF (NYSEARCA:UUP) chart below:

The USD had bottomed out prior to the June FOMC statement, but the disappointing statement caused it to resume the previously caution-driven bearishness. Given that it has broken below the support level of 24.8, it is likely to weaken further.

Strong economic data released after this might cause USD strength, but it is likely to be short-lived until we have the official interpretation from the FOMC. By that I mean the statement and not the speeches by key FOMC members such as Fed Chair Janet Yellen who gave a bullish speech about the outlook of the US economy which set market expectations.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.