The better-than-expected May nonfarm payrolls may allow traders to take a breathe, particularly for those who wish for sooner normal rates. However, slowdown may reappear in the job market.

Last week's data has given the market more confidence in September rate hike projection. However, Federal Reserve will need more confirmation to do so.  Economists surveyed by Bloomberg reportedly revealed that there are almost 40% chance the Federal Reserve will delay interest rate hike beyond September if jobs gains or inflation stalled.

 

Dolar

  

Data Dependent

Federal Reserve officials have repeatedly remarked that they do not have a clear schedule for rate hike. Contrarily, the Fed rate hike will depend on whether economic data supports tightening or not, particularly data on job and inflation. Various data will be evaluated from time to time to find an auspicious moment for the most-awaited event. Fed FOMC chief, Janet Yellen, in her latest highlighted speech at May 22nd repeated her pledge on this matter; rate hike will be done this year if if the economy continue to improve as expected. 


In the circumstances, analysts and investors continue to monitor newest reports from the US to predict when the Fed will start hiking rates. Unfortunately, although market confidence in the US Dollar slowly awaken, analysts prefer to warn caution.


According to the median in a recent Bloomberg News survey, there is only 50% chance that the Fed will hike rates in September. Meanwhile, the same survey found 9% chance of October rate hike, 20% chance for December and 10% chance for after 2016. It is also expected for the Fed to slow its rate hike pace through the next few years. 

 

Less Steady

The better-than-expected May nonfarm payrolls may allow traders to take a breathe, particularly for those who wish for sooner normal rates. However, slowdown may reappear in the job market. Also, the current unemployment rate is considered insufficient to support sustainable wage growth. As mentioned by Lynn Reaser from Point Loma Nazarene to Bloomberg, We may need an unemployment rate close to 5 percent before we begin to see more significant increases in wages that are broad based.

 

Data

US Unemployment Rate June 2014-May 2015
 

According to last week's report, US unemployment is at 5.5% with hourly earnings for production and non-supervisory workers averaged 2.1 percent since June 2009. This is still far from the expected improvement. Most economist surveyed by Bloomberg point at 4.5% to 5% unemployment as levels where 3% average hourly earnings can be supported. 

It also needs to be noted that inflation is still far from the Fed's two percent target, and that target is not likely to be attained any time soon. 23% of economist said that three consecutive months of inflation at 2% or more will only happen in the first quarter of 2016, while 25% refer to the second quarter of 2016, and 35% said that it will not happen before 2016 ends.

 

Ahead of Retails

Shaky grounds for Fed rate hike projection means there is no strong support for a dollar rally. This is because the market will continue to track the latest economic data, and along with it, the probability of Fed rate hike within 2015 will change.


In the circumstances, tonight's release of May retail sales record is considered by some as a chance to buy Dollar. Analysts expect retail sales that slumped in the previous month to recover firmly and rise substantially. In April, the record was flat at 0% (MoM) due to drop on fuel sales. But tonight record is expected to reach 1.1% (consensus).


Retail sales can be one of the early indications of inflation because higher sales provide opportunities for businesses to expand, increase prices and wages. Because of thet, if retail sales actually goes up as expected or even more than that, there is a huge chance for Dollar to stand firmer in the following days ahead of FOMC meeting in June 16-17, most notably against the Euro that is still haunted by uncertainties around Greece heavy debt.